Kiwibank urges rate cut
Jarrod Kerr (pictured above), chief economist at Kiwibank, has called for the Reserve Bank (RBNZ) to cut the cash rate by 25 basis points to 5.25% next week.
Kerr likened the recent rate movements to a “bull on steroids stung by a bee,” highlighting the volatility and rapid changes in the market.
Economic recession and inflation cooling
“We know the economy has been in a recession since the end of 2022,” Kerr said.
He stressed that inflation is cooling, with rates dropping from 7.3% to 3.3%, and forecasts indicating it will fall below 3% in the current quarter.
The labour market is also weakening, with the unemployment rate rising from 3.2% last year to a projected 4.7%.
Housing market struggles
Kerr pointed out that the housing market is struggling to find solid ground, with house prices remaining well below their peak.
“Given what we know, we would cut now,” he said, suggesting that RBNZ’s cut would help support confidence throughout the economy.
Market reactions and future projections
The rates market has already priced in significant cuts, with nearly 220 basis points of cuts anticipated by next August.
Kerr warned that anything less than a cut in August could cause a large spike in wholesale rates.
“The economy needs support. If the RBNZ cuts as we suggest, and signals more to come, we’d expect the recent rampant rally in rates to hold,” he said.
Kiwibank on potential scenarios
Kerr outlined three potential scenarios if the RBNZ holds rates:
- Hold and signal October cut: This would be brutal for the market, causing a significant reprice.
- Hold and signal November cut: Devastating for hedge funds and received positions.
- Hold until 2025: This would be a significant shift and cause market turmoil.
Kerr highlighted the need for RBNZ to act decisively to support the economy.
“We recommend a cut next week, followed by a cut at every meeting until the cash rate hits 2.5%,” the Kiwibank economist said.
For more details on the economic outlook and market projections, refer to Kiwibank’s comprehensive analysis.
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