RBNZ rate cuts loom
If there was a surprise in the Reserve Bank’s (RBNZ) greenlighting of early rate cuts last week, it was only in the timing.
“The economy is buckling, inflation is beaten, and rate cuts would ultimately be delivered much earlier than RBNZ projections,” said Mike Jones (pictured above), BNZ chief economist.
The RBNZ’s newly adopted easing bias means that all remaining meetings in 2024 are “live” for a possible cut in the OCR.
“It’s worth noting that the RBNZ has delivered a decent easing in financial conditions already,” Jones said. “The NZ dollar (TWI) is almost 1% below levels prior to the RBNZ meeting, wholesale interest rates are down 15-30bps, and some mortgage rates have fallen already.”
Economic activity indicators decline
Economic activity indicators are showing signs of weakness.
The Performance of Manufacturing (PMI) and Performance of Services (PSI) indices recorded significant declines in June, with the PMI at its lowest level since the GFC and the PSI at its weakest in its 17-year history.
“The additional, sizeable declines in the month of June put the PMI at the lowest level since the GFC (outside of lockdown months), and the PSI at the weakest level in the 17-year history of the series,” Jones said.
Inflation control efforts
Inflation appears to be under control. Rent inflation, a significant component of the CPI, is showing signs of easing.
“Annual rent inflation for the stock of existing tenancies held up at 4.5% y/y in June,” Jones said. “However, the tide appears to be turning, and this measure should soon turn lower. CPI inflation should fall rapidly over the remainder of this year and be well within the RBNZ’s 1-3% target range by the September quarter.”
Employment challenges
Employment is under pressure as firms become more aggressive in cost-cutting.
“Investment plans were shelved long ago. It’s on the staffing front where changes are afoot,” Jones said. “A net 10% of employers now say they will be reducing staff in the September quarter.
“Our projections for the unemployment rate to rise to 5 1/2% by the start of next year have been largely built on expectations of stalled hiring against rising labour supply. The prospect of deeper employment cuts, as seem increasingly inevitable, means the rise in unemployment could occur faster than we’ve allowed for.”
For more insights and detailed analysis, visit the BNZ website.
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