Economist notes "marked change in tone" from central bank
Kelly Eckhold (pictured above), Westpac’s chief economist, noted a significant change in the Reserve Bank’s (RBNZ) tone during the July OCR review.
“We were very surprised by the marked change in tone in this week’s July OCR Review,” Eckhold said, pointing to a more optimistic outlook for inflation and a less optimistic outlook for economic activity.
Economic data influences
Eckhold explained that the latest data, including business surveys, indicated a contraction in GDP and easing pressures in the labor market.
“Collectively, these surveys suggest that GDP likely contracted in the June quarter,” he said.
Additionally, firms' pricing intentions suggested that inflation might soon return to target levels.
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Conditions for easing
Eckhold outlined several conditions that could prompt RBNZ to start cutting rates, including a significant downside surprise in CPI data, a rise in unemployment rates, and weaker GDP growth.
“For easing to begin in August, we would likely need to have seen a significant broad-based downside surprise in the Q2 CPI on 17 July,” he said.
Potential timelines for rate cuts
The timing of potential rate cuts could vary.
“A first easing to occur at the October meeting would likely require the RBNZ to have foreshadowed some probability of an October easing at the August statement,” Eckhold said.
Alternatively, a first easing in November would depend on continued weakness in economic indicators and inflation.
RBNZ’s confidence in inflation outlook
RBNZ’s increased confidence in achieving its inflation targets was a key factor in its shift.
“The weaker growth expectations help increase confidence that medium-term inflation will move towards 2%,” Eckhold said, emphasising the importance of seeing inflation drop below 3% to justify policy easing.
Market reactions and future Expectations
The abrupt change in RBNZ’s tone indicates a potential shift towards earlier easing.
“The decision to change course in the July review likely means that the RBNZ now sees some possibility that incoming data could make a compelling case for policy easing before the end of this year,” Eckhold said.
Read the Westpac Economic Bulletin here.
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