Economists predict swift moves on OCR
According to Westpac NZ chief economist Kelly Eckhold and ASB chief economist Nick Tuffley (pictured above, left to right), the Reserve Bank (RBNZ) is expected to cut the OCR by 50 basis points in both October and November.
This shift in policy marks a quicker move to neutral settings than previously anticipated, driven by a changing inflation outlook and easing economic conditions.
Eckhold explained that, while the October cut is likely with a 60% chance, November’s adjustment appears more certain as inflation is projected to fall closer to the target range.
“We now see two consecutive 50bp cuts in the OCR in October and November,” Eckhold said, noting that by the end of 2024, the OCR should sit at 4.25%, just above the long-term neutral rate of 3.75%.
Inflation pressures waning
Both economists agree that inflation is easing faster than expected.
Recent business confidence surveys, such as the NZIER’s Quarterly Survey of Business Opinion (QSBO), show a marked reduction in pricing pressures.
“The QSBO confirms that near-term economic momentum likely remains in negative territory,” Eckhold said, indicating that inflation will likely drop to 2.2% by year-end.
ASB’s Tuffley shared a similar sentiment.
“The deterioration of the labour market has picked up steam, and pricing pressures have weakened considerably,” he said.
Tuffley stressed that the risk of high inflation lingering has significantly decreased, making the case for a more aggressive OCR reduction to avoid overshooting inflation targets.
Addressing tight monetary conditions
Both economists are concerned that the current monetary policy settings remain too restrictive for the slowing economy.
Tuffley said that the ASB Taylor Rule suggested the OCR should be much lower than its current 5.25%.
“Our estimates point to the OCR needing to be in a 2.75% to 4.25% range by the end of the year,” he said, emphasising that tighter fiscal conditions and reduced migration will further dampen demand if the OCR is not adjusted swiftly.
Eckhold echoed this, noting that RBNZ will likely face a prolonged period of subdued inflation and economic activity if cuts aren’t made quickly.
“There’s a less obvious case for maintaining restrictive settings now,” Eckhold said.
Balancing risks ahead
Both economists stressed that while the cuts are necessary, RBNZ must avoid cutting rates too aggressively in 2025.
Eckhold warned that overshooting with rate cuts could drive housing prices up unnecessarily, making them more unaffordable.
Tuffley added that faster cuts now could reduce the overall need for more substantial cuts later.
RBNZ’s monetary policy committee will be closely watching inflation and labour market data in the lead-up to their October and November meetings, with both economists predicting significant policy easing over the next few months.
Read the Westpac and ASB reports in full.
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