Rate cut expectations deferred
Infometrics has revised its projection for the first OCR cut, now anticipating it to occur in February 2025 instead of November 2024.
“Although we don’t think a further delay in beginning to cut the OCR is necessarily the right move, the bank’s backward-looking approach to setting monetary policy means that households and businesses will need to wait longer for any interest rate relief,” said Gareth Kiernan (pictured above), Infometrics chief forecaster.
Discussions of rate increases amid economic deterioration
The Reserve Bank’s recent discussions have included the possibility of raising the OCR, as evidenced by its updated forecast which slightly increased the peak OCR from 5.6% to 5.65%. This discussion hints at a more hawkish monetary policy stance.
“In our view, there is no justification for another interest rate hike,” Kiernan said, citing weakened demand, deteriorating business and consumer confidence, and a struggling labour market as major concerns.
The lag effects of previous OCR increases are only now becoming fully apparent, exacerbating financial pressures on households.
Inflation concerns and policy challenges
The Reserve Bank continues to express concerns over persistent non-tradable inflation, which has only modestly decreased from 6.8% to 5.8% year over year. This slow decline in domestic price pressures suggests that earlier policy tightening has not sufficiently tempered price-setting behaviour within the economy.
“The bank’s reluctance to cut interest rates anytime soon is driven by ongoing high non-tradable inflation rates and significant increases in local authority rates, house insurance, and electricity costs,” Kiernan said.
Even areas beyond the bank’s direct influence, such as insurance and utility costs, are experiencing steep price increases.
A cautious outlook on economic policies
The Reserve Bank’s less proactive stance in recent years has been critiqued for not adequately anticipating economic shifts.
“The experience of the last three years has reiterated the fact that interest rate changes by the Reserve Bank take several quarters to flow through and affect real economic activity,” Kiernan said, pointing out that the bank has become less forward-looking in its monetary policy decisions.
This cautious approach may delay economic recovery and prolong the period of high inflation and economic hardship for New Zealanders.
Future expectations and monetary policy implications
While Infometrics hopes for an OCR cut by mid-2025, they remain sceptical about the Reserve Bank’s willingness to adjust its policy soon enough to mitigate prolonged economic pain.
“For now, we’ve pushed our expected timing of the Reserve Bank’s first interest rate cut to February next year, when the bank should have data showing headline inflation below 3%pa and non-tradable inflation below 4%pa,” Kiernan said, emphasising the need for a more responsive monetary policy to avoid deepening the economic downturn.
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