Interest rate cuts coming ... but when?
Virtually no chance of rates cut or hike by Reserve Bank this Wednesday
On Wednesday, the Reserve Bank delivers a Monetary Policy Review, which means a fresh call on the official cash rate, without a full statement of analysis and new forecasts. The economic consensus is that there is virtually no chance it will move the official cash rate (OCR) from its current level of 5.5 per cent in either direction.
Most economists believe the next move, when it comes, will be a cut. But few expect the short statement we’ll get on Wednesday will hold many clues as to when.
For the record, given it is what everyone really wants to know, the consensus seems to be that we’ll see the first cut in November.
The Reserve Bank (RBNZ) itself still has the first cut pushed out into 2025, but there is a growing market expectation that tough economic conditions will bite and push inflation down to allow cuts before then.
Sydney-based economists with investment bank UBS warned on Friday that they see a growing “risk” of a cut by August. Having passed the peak of the hiking cycle, the RBNZ is now “confronted by a complex policy trade-off: balancing sticky domestic inflation against clear signs of broadening financial stress”, they said.
RBNZ’s recent communications suggested it was strongly prioritising bringing inflation down. “But if current trends in arrears and non-performing loans continue on their recent uptrend, by the time of the RBNZ’s May Financial Stability Review, their assessment of the risks may have materially shifted”, which could lead to a more dovish reaction approach, they said. For now, UBS is sticking with its forecast for the first cut in November but sees the risk of an earlier rate cut in August.
HSBC Australia New Zealand chief economist Paul Bloxham also expects a cut in November.
“Inflation is gradually falling in New Zealand,” he said. “A key part of the story is that although goods consumption and production are declining, driving a fall in GDP, services activity has held up well, which has left services inflation sticky and elevated This is partly due to continued demand for services, but critically, because the supply side of the domestic economy has been weak.”
Bloxham expected this week’s short statement to stick with the RBNZ’s central projection in February — no cuts — but noted HSBC’s central case was that inflation will fall back into the RBNZ’s 1-3 per cent target band by the third quarter of 2024 and it would make its first cut in the fourth quarter this year.
ANZ chief economist Sharon Zollner said she wasn’t expecting a “game-changer” this week.
Taking a look at developments since the monetary policy statement of February 28, she said the GDP data was close to the RBNZ’s expectation.
“Confirmation of recession appears to have dampened both business and consumer confidence in March, though the data from earlier in the month preceding the release was still down versus February,” Zollner said.
Meanwhile, the services index and manufacturing index both lifted. Card spending was higher in January but fell back again in February.
“Net migration is looking toppy but past outcomes are tending to be revised higher,” Zollner said.
Building consents had stayed weak, as the RBNZ expected.
Inflation pressures remain too strong but were gradually easing.
Inflation expectations continued to drop, although they still suggested a meaningfully slower return to target than the RBNZ was forecasting.
Kiwibank economists also see no move from the RBNZ on Wednesday.
But they see the tide of central bank direction turning globally.
“After many months of fast and furious rate hikes, the next chapter of monetary policy is upon us: rate cuts,” they said.
“Many central banks, the RBNZ included, will want the [US Federal Reserve] to act as an icebreaker. It’s more likely that the Fed will cut mid-year, followed by the European Central Bank and Band of England in quick succession.”
“The Aussies were late to the rate-hiking party but could beat us [RBNZ] to rate cuts. While the RBNZ was among the first to start hiking rates, it’s likely they’ll be among the last to cut.”