Lower rates expected by 2025
Westpac NZ has revised expectations for the OCR, predicting a lower peak in the easing cycle.
The bank anticipates a 50-basis-point (bps) cut in November, followed by gradual reductions into the first half of 2025.
The new forecast suggests the OCR will reach 3.50% by May 2025, slightly below the previously predicted 3.75%.
A shift toward neutral territory
The updated forecast reflects a shift in monetary policy as inflation returns to the Reserve Bank’s (RBNZ) target range of 1-3%.
Westpac’s chief economist, Kelly Eckhold (pictured above), said that easing interest rates can now focus on stabilising inflation rather than reducing it.
“The OCR can move closer to neutral more quickly, and we expect another 50bp cut before Christmas,” Eckhold said. “We expect further cuts early next year, with the OCR to fall slightly into stimulatory territory at a trough of 3.50% by May 2025.”
Gradual easing expected in 2025
The pace of rate reductions is expected to slow in 2025 as the OCR nears neutral levels, which Westpac estimates at around 3.75%. This more cautious approach will allow time to assess the impact of previous rate cuts.
“The labour market is set to continue softening as past weakness in output plays through,” Eckhold said. “The adjustment in wage pressures will be a key factor that helps to finally bring down stubbornly high non-tradables inflation.”
Inflation “back in the band”
The theme of Westpac’s Economic Overview is “Back in the Band,” referring to inflation returning to the RBNZ’s target range.
After several years of elevated inflation, consumer prices are now expected to hover near 2%, marking the first time since 2021 that inflation has stayed comfortably within the desired range.
With inflation slowing, lower interest rates, and improving export incomes are anticipated to boost business and consumer sentiment, along with renewed activity in the housing market.
However, uncertainties such as geopolitical tensions and the upcoming US election could affect global markets, requiring RBNZ to remain flexible in its policy adjustments.
Current account and fiscal deficits pose challenges
Despite the positive outlook, Eckhold highlighted the need to address New Zealand’s twin current account and fiscal deficits.
“If those adjustments can’t or won’t happen, the exchange rate will likely do the adjustment for us,” the Westpac economist said. “But for now, we should enjoy being ‘back in the band!’”
Read the Westpac insights here.
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