Close call for August OCR decision
Kim Mundy, senior economist at ASB, has revised the bank’s official view, now anticipating that the Reserve Bank (RBNZ) will deliver a 25-basis-point (bp) rate cut at its upcoming monetary policy statement on August 14.
“But it’s a very close call,” Mundy said, noting that the decision will heavily depend on how much the RBNZ’s outlook has softened since its last forecast in May.
Economic weakness spurs change
Over the past six months, the outlook for New Zealand’s economy has weakened noticeably, according to Mundy.
“We anticipate that the RBNZ will trim its growth outlook considerably,” she said, predicting a more rapid opening up of spare capacity and increased weakness in the labour market.
Mundy added that RBNZ has a clear opportunity this week to start cutting the OCR and to provide clearer, data-dependent guidance for future policy moves.
Inflation expectations offer support
Recent data, including the Q3 survey of expectations, suggests that inflation is likely to fall within the RBNZ’s 1-3% target.
“The closely watched two-year ahead measure fell to 2.03%, its lowest since Q1 2021," Mundy said, indicating that this should add to the RBNZ’s confidence in beginning an easing cycle.
Market reaction and global influence
Globally, focus remains on the health of the US economy and potential Fed rate cuts. Recent drops in US jobless claims have helped calm markets, leading to a lift in US Treasury yields.
In New Zealand, market pricing for an RBNZ rate cut has firmed, with a 73% chance of a cut next week, up from 44% following Q2 labor market data.
“RBNZ has a clear opportunity [this] week to start cutting the OCR,” Mundy said, urging RBNZ to seize the moment to mitigate future economic scarring.
This call was echoed by Kiwibank economists, while ANZ predicted that RBNZ will maintain the OCR at 5.5%.
Read the full ASB report here.
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