Banks predict two consecutive 50-basis point cuts before year-end
New Zealand’s largest banks unanimously predict the Reserve Bank accelerating monetary easing with two consecutive 50-basis point interest rate cuts by year-end, amid growing concerns about potentially undershooting its 2% target.
The RBNZ kickstarted its easing cycle with a modest 25-basis-point cut to 5.25% in August and is now expected to reduce the Official Cash Rate to 4.75% on October 9, followed by another reduction to 4.25% on November 27, according to economists at all five of New Zealand’s major banks.
Signs of economic straits are mounting. GDP contracted in the second quarter, unemployment is trending upward, and house prices are going down under the weight of a tight borrowing cost.
A recent business confidence survey revealed a sharp decline in pricing intentions, with a net 7% of firms planning price increases, down from 23% previously. In the same survey, a net of 22% of merchants reduced prices in the September quarter.
Stephen Toplis (pictured), Bank of New Zealand’s head of research, points to clear evidence that containment of inflation has been achieved, suggesting the annual rate could soon fall below the RBNZ’s 2% target midpoint. His team now projects inflation to reach 2% by March and potentially drop to 1.7% by late 2025.
This hawkish stance is quite a change of heart from May, when the RBNZ indicated no rate cuts until mid-2025. Even after its August pivot, Governor Adrian Orr emphasized a preference for “measured” policy adjustments.
But there’s mounting evidence that the bank overcorrected after its pandemic-era stimulus, with Kiwibank chief economist Jarrod Kerr noting that “overly restrictive monetary policy has inflicted much pain and tamed the inflation beast”.
Current indicators support the case for aggressive easing:
- Annual inflation at 3.3% in Q2, expected to fall to 2.3% in Q3
- GDP contraction in Q2
- Rising unemployment
- Falling house prices
- Declining business pricing intentions
The market is anticipating substantial easing, with 13 of 17 economists surveyed by Bloomberg expecting a 50-basis-point cut the following week. Swap markets show signs of 75% probability of such a move. Yet some analysts caution that the Oct. 9 meeting, being a review rather than a full policy statement, may not be the ideal forum for such a shift.
The public is in anticipation of RBNZ’s decision as it will determine the risks of undershooting the inflation target against maintaining policy credibility to ensure sustainable economic recovery.
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