Kiwibank economists predict further rate cuts despite concerns over inflation and economic recovery
The Reserve Bank of New Zealand (RBNZ) concluded its 2024 monetary policy decisions with a widely anticipated 50 basis point (bps) cut, bringing the OCR down to 4.25%. However, the central bank’s long-term outlook raised eyebrows, signaling a higher-than-expected neutral rate.
Kiwibank economists had forecasted the OCR would continue to drop to 3%, followed by a pause and a possible dip to 2.5%. RBNZ’s decision suggests it now sees 3% as a neutral level, where monetary policy neither stimulates nor restricts the economy.
“The RBNZ is more comfortable than we are with the economic scarring inflicted and likely recovery,” said Kiwibank economists Jarrod Kerr (pictured above, left) Mary Jo Vergara (pictured above, right), and Sabrina Delgado (pictured right), adding that the central bank might be “too hawkish” in its outlook.
What’s next for 2025?
While the recent cut brings immediate relief, economists expect the RBNZ to continue with smaller reductions of 25bps throughout 2025. The next OCR decision in February is expected to include another 50bps cut.
At the same time, RBNZ revised its long-term neutral rate from 2.75% to 2.9%, reflecting a more cautious approach to monetary easing.
“We still need more cuts, and we need the cash rate below 4% as soon as possible,” the economists said, emphasising the need for rate reductions to support the economy amid ongoing recessionary conditions.
Financial markets react
The latest rate cut left Kiwi interest rates largely unchanged in the short term but caused a material flattening of the yield curve as long-term rates dropped by 10bps. Meanwhile, the Kiwi dollar remained stable, trading within its recent range despite global market volatility.
Economic challenges persist
Domestically, the construction sector continues to struggle, with building activity showing weakness across residential and non-residential projects. Overseas, economic growth in Australia and the US reflects ongoing challenges, including high interest rates and weak consumer activity.
With inflationary pressures expected to ease gradually, Kiwibank, which recently lowered its home loan and business lending rates in response to the RBNZ’s recent OCR cut, predicted that further RBNZ cuts could stabilise the economy, but recovery may not materialise fully until mid-2025.
Read the Kiwibank report in full for more details.
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