Rate Cut As Economy Significantly Surprises To The Downside

The market and forecasters were split between a 25bp cut and no change going into today’s RBNZ decision. The RBNZ delivered a 25bp rate cut to 5.25% as it decided to “ease the level of monetary policy restraint” due to greater excess capacity, confidence that inflation will return to the band in Q3:24, downside risks and inflation expectations at the target mid-point. There were large forecast revisions implying that the degree of weakness in the economy had taken the bank by surprise.

• There were significant downward revisions to the OCR path which is now 80bp lower by end-2024, 130bp by end-2025 and 60bp by end-2026 with the terminal rate still 3% in Q2 2027. This profile implies 1-2 cuts by end-2024 and at least 100bp in 2025.
• Governor Orr has previously said that the OCR path is not a target but in the meeting record the MPC “felt that the OCR track in the projection reflected its view on the policy strategy that would best deliver on its remit.” If the economy is as weak as the RBNZ believes, then there could be a 25bp cut at each of the next MPS meetings, but further easing will be “conditional” on inflation expectations remaining anchored and “pricing behaviour” adapting to the “low inflation environment”.
• There were large downward revisions to 2024 GDP growth with a technical recession forecast for Q2/Q3. This has led to a widening of the negative output gap and increase in unemployment rate expectations.
• As a result of greater excess capacity and lower import prices, there was a large downward revision to Q3 2024 CPI to 2.3% from 3.0% in May, close to the band mid-point. It is expected to stay around this rate through 2025 before reaching the 2% mid-point in Q2 2026, which is unchanged.