ASB and Westpac offer insights
As New Zealand grapples with economic recovery challenges, the Reserve Bank (RBNZ) is closely monitoring inflation expectations and economic indicators to guide its monetary policy decisions.
According to the latest ASB Economic Note and Westpac’s First Impressions report on the RBNZ Survey of Expectations for the first quarter of 2025, both institutions suggest further easing of the OCR could be on the horizon.
Inflation expectations and OCR cuts
Nick Tuffley (pictured above left), ASB’s chief economist, noted that inflation expectations are effectively anchored around 2%, which is within RBNZ’s target range.
This stabilisation in expectations is seen as a green light for the RBNZ to implement a 50-basis-point cut in the upcoming policy meeting.
“Inflation expectations are effectively at 2%, with welcome falls beyond the one-year ahead horizon and a modest tick-up in short-term inflation expectations,” Tuffley said, highlighting the balanced outlook on price growth.
The survey data indicated that while there’s a modest increase in short-term inflation expectations, likely due to a weaker NZ dollar and global inflationary pressures, the long-term outlook remains stable.
This suggests that RBNZ might lower its estimates for the neutral OCR, potentially leading to more aggressive rate cuts if these conditions persist.
Economic indicators supporting further rate cuts
Westpac’s report, authored by senior economist Satish Ranchhod (pictured above right), aligns with ASB’s analysis, noting that near-term pressures on prices from a lower NZ dollar have not significantly shifted long-term inflation expectations, which remain close to 2%.
“Expectations for inflation over the coming year have picked up slightly, rising to 2.15% from 2.05% previously,” Ranchhod said.
However, the expected inflation in two years’ time edged down, underscoring the view that any current inflation pressures are seen as temporary.
Both ASB and Westpac predict that RBNZ will not only cut rates next week but continue easing throughout the year.
Tuffley expects a 3.25% OCR by mid-2025, indicating a more substantial loosening of monetary policy than initially anticipated.
RBNZ’s approach to future rate decisions
RBNZ is using these inflation expectations and other economic data to navigate its monetary policy. The focus is not just on current economic conditions but also on ensuring that inflation remains stable and that any rate cuts support long-term economic stability.
The central bank’s strategy involves a delicate balance between fostering economic growth and preventing inflation from deviating from its target range.
Challenges and prospects
Despite the well-anchored inflation expectations, RBNZ faces several challenges, including global trade tensions and local economic indicators suggesting slower recovery.
The upcoming decisions will be crucial in setting the pace and extent of economic support through monetary policy.
ASB and Westpac highlighted that while immediate actions are likely to involve rate cuts, the long-term strategy will need to remain flexible to adapt to changing economic conditions.
For more insights, read the ASB Economic Note and the Westpac NZ First Impressions.
