It says cuts will only occur when inflation goes back under 3%
The Reserve Bank of New Zealand (RBNZ) is expected to cut rates in November at the earliest, according to economists from KiwiBank.
In the bank’s report, chief economist Jarrod Kerr, senior economist Mary Jo Vergara, and economist Sabrina Delgado forecast that while inflation was falling, the RBNZ will not be cutting back on rates any time soon.
“We expect the RBNZ to hold the cash rate at 5.5%. And they will maintain a very forceful bias, for now,” the economists said, adding that cuts will only occur if the inflation falls back below 3%.
With the RBNZ set to make a decision regarding the cash rate on Wednesday, the economists believe that there will be no hikes due to the progress seen with inflation as well as the continued weakening in the economy.
The economists said that the earliest time the RBNZ will be cut rates is November, which is when the 3Q CPI report will be released.
“By our forecasts, we see inflation returning to within the RBNZ’s 1-3% target by the September (third) quarter. And it’s not until mid-October that we receive the data, and (hopefully) confirmation. Thus, leaving November as the earliest kick-off date for rate cuts,” the economists said.
They pointed out that there were risks to their forecasts, with stickiness and stubbornness of domestic inflation being the largest upside risk.
“Inflation continues to move in the right direction, but with the wrong mix. Inflation has fallen from 7.3% to 4.0%… but it is imported inflation that’s doing all the work,” said the economists.
The downside risks which could lead to the RBNZ begin cutting rates at an earlier time were the employment data as it had turned out softer than expected, with unemployment rate reaching 4.3% as employment rate slowing to 1.2% and wage inflation slowing to 3.8%.
“The Phillips Curve is in action. That is, as demand is restrained, the labour market loosens (unemployment lifts) and inflation eases. And it is all by RBNZ design,” said the economists.
