NZIER economists discuss the implications of cautious shift
The Reserve Bank of New Zealand’s (RBNZ) unexpected decision to cut the Official Cash Rate (OCR) by 25 basis points, lowering it to 5.25%, has drawn swift reactions from leading economists. Ting Huang (left) and Kelvin Davidson (right) of the New Zealand Institute of Economic Research (NZIER) have provided their insights into this surprise move, which occurred during the RBNZ's August Monetary Policy Statement.
They note the decision was influenced by recent indicators showing a slowdown in economic activity despite earlier signs of easing capacity pressures, particularly within the labor market.
The RBNZ had previously been cautious about initiating an easing cycle due to persistently high non-tradable inflation. However, the central bank's focus shifted as new data revealed weakening global demand, especially from China, prompting the earlier-than-expected rate cut.
With inflation starting to return within the target range and businesses' price-setting behavior stabilizing, the RBNZ revised its OCR projections downward. This adjustment reflects the bank's view that additional cuts might be necessary to maintain inflation at the 2% target over the medium term.
Looking ahead, NZIER economists expect that further easing could be on the horizon, with another 25 basis-point reduction anticipated at the RBNZ's October meeting, depending on how inflation and other economic indicators evolve.
