November rate cut likely: ANZ
ANZ economists predict that the Reserve Bank (RBNZ) will maintain the OCR at 5.5% in its upcoming meeting. However, the bank may signal a potential cut later in the year.
Economic indicators point to slowdown
Recent data indicated a slowing economy and significant disinflation progress.
“The data since May, and particularly since the July monetary policy review, points to a clearly slowing economy, and solid disinflation progress,” ANZ chief economist Sharon Zollner (pictured above) said.
These indicators suggest the possibility of an earlier-than-expected OCR cut, potentially as soon as November.
Risks and considerations
While there are clear signs of economic weakness, Zollner noted the absence of a definitive trigger for an immediate rate cut.
“We certainly wouldn’t rule out a cut next week, as risks have clearly tilted towards more economic weakness than is necessary to beat inflation. But there’s no smoking gun in the top-tier data,” she said.
Prospects for an OCR cut
Zollner stressed the need for further evidence before making substantial changes to the OCR.
“The monetary policy committee will conclude that waiting for more evidence of the state of play is justified–and relatively low cost, given monetary conditions have already eased substantially,” she said.
The first cut is expected in November, with a possibility of an earlier cut in October if economic conditions continue to deteriorate.
Factors for and against an immediate cut
Arguments for an OCR cut
- High-frequency activity data has shown a clear decline.
- Inflation expectations and wage-setting measures are aligning with targets.
- Potential for early cuts given long monetary policy lags.
Arguments for holding
- Non-tradable inflation remains high at 5.4% year-on-year.
- RBNZ’s prior forecast indicated cuts around the end of the year, not now.
- Mixed data signals with some stronger-than-expected indicators, like private consumption and labor market data.
Market reactions and expectations
Markets are currently anticipating significant cuts by next year, which could lead to disappointment if RBNZ holds steady.
“We suspect markets will be in for a reasonable degree of disappointment next week, especially if we go into the MPS with non-trivial odds of an August cut still priced in,” Zollner said.
Overall, while RBNZ may consider an OCR cut, the likelihood remains for a later adjustment, contingent on accumulating evidence of economic trends and inflation control.
To read about ANZ’s previous rate forecast, click here.
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