It urges RBNZ for 50bp cut to bolster economic stability
The NZIER monetary policy shadow board has voiced a strong recommendation for the Reserve Bank (RBNZ) to lower the OCR by 50 basis points to 3.75% in the upcoming February monetary policy statement.
Amid an economy grappling with softening activity and a tepid labor market, the board sees this move as crucial. Inflation remains controlled within the RBNZ’s target band of 1% to 3%, further supporting the case for a rate reduction.
Outlook for OCR in the upcoming year
The consensus among the shadow board members suggests positioning the OCR between 2.75% and 3.5% over the next year, mirroring broad intent to moderate the pace of future rate cuts, said Ting Huang (pictured above), senior economist at NZIER.
While concerns linger over the inflationary pressures from US fiscal changes and a declining New Zealand dollar, a fraction of the board advocates for more aggressive cuts due to persisting economic sluggishness.
Insights from economic experts
Stephen Toplis, BNZ head of research, commented on the ongoing adjustments.
“There is no doubt the cash rate needs to continue falling,” Toplis said. “The only debate is how far and how fast. With inflationary pressures far from extinguished, the NZD weakening, the cash rate converging on neutral, and Trump-driven uncertainty elevated, the RBNZ may soon need to adopt a more cautious approach while still pushing rates inexorably lower.”
Jarrod Kerr, Kiwibank chief economist, pointed out the current economic safeguards and looming risks.
“Inflation is back in its box, and should average 2% from here,” Kerr said. “There are growing risks to the downside offshore. Our recovery is fragile and needs a neutral policy setting – which is closer to 3%. And if any of these downside risks begin to dominate, then an easier policy prescription could be required.”
In a recent commentary, the Kiwibank economist urged prompt action, saying, “Why wait? Why muck around?” to emphasise the importance of reaching the neutral rate this year to avoid tight conditions and job losses.
Kelly Eckhold, Westpac NZ chief economist, stressed inflation control.
“The easy wins on the inflation are over, and there are a number of factors that mean inflation will remain in the top half of the target range – even if the economic recovery is modest,” Eckhold said.
“The strength in the terms of trade could persist, even with the worse global trade environment, as our exchange rate is likely to buffer the worst impacts, and we won’t likely be directly subject to tariffs.”
Eckhold also indicated a more gradual pace of easing after an anticipated 3.75% cut this week.
Strategic implications and future directions
The discussion extended beyond immediate rate cuts to encompass broader economic implications and strategic adjustments required to navigate a volatile global economic landscape.
The panel underscored the importance of responsive policy adjustments to manage both domestic and international fiscal pressures effectively.
The anticipated OCR reduction is seen as a key strategy for fostering economic stability and growth while balancing the necessity for a prudent monetary policy amid uncertain economic conditions.
