The Reserve Bank Monetary Policy Committee (MPC) cut the Official Cash Rate (OCR) by an outsized 0.5% to 4.75% today in line with the expectations of most local economists.
The MPC considers current excess capacity is dampening wage and prices and it is confident inflation is now in the Reserve Bank’s 1-3% target range. In addition, global economic growth is slowing and there are significant risks to the global outlook.
The MPC agreed that cutting by 0.5%, rather than 0.25%, is most consistent with the MPC’s mandate of maintaining low and stable inflation, while seeking to avoid unnecessary instability in output, employment, interest rates, and the exchange rate. It also highlighted that at 4.75% the OCR remains restrictive and is well placed to deal with any near-term surprises. Therefore, the MPC appears to implicitly acknowledge that not making sizable near-term OCR cuts risks causing an unnecessarily severe dip in output and employment, possibly requiring even sharper OCR cuts in the future.
The MPC indicates that future changes to the OCR would depend on its evolving assessment of the economy. In this regard, the September quarter Consumer Price Index and labour market statistics will be critical in informing its near-term OCR decisions. However, the MPC’s disclosures today suggest that unless there is a material upside inflation surprise or downside unemployment rate surprise the scene is set for another 0.5% cut at its next meeting on 27 November.
The imperative to cut 0.5% again in November is intensified by the extended period between then and the MPC’s subsequent meeting on 19 February. During that period, other central banks globally will likely have further cut their policy interest rates meaning the Reserve Bank would lag considerably in the global race to cut interest rates, which could put unnecessary upward pressure on the New Zealand dollar.
The New Zealand economy is on the floor and will take some time to recover. The OCR will likely need to continue declining until it is somewhere around or below 3% (which is around the interest rate that is neither stimulatory nor contractionary) before the New Zealand economy sustainably regains its glow. We expect the OCR will reach 4.25% by the end of this year and reach 2.75% by the end of 2025.
John Carran is Director, Investment Strategist and Economist, Wealth Research. The information and commentary in this article are provided for general information purposes only. It reflects views and research available at the time of publication, using external sources, systems and other data and information we believe to be accurate, complete and reliable at the time of preparation. We make no representation or warranty as to the accuracy, correctness and completeness of that information, and will not be liable or responsible for any error or omission. It is not to be relied upon as a basis for making any investment decision. Please seek specific investment advice before making any investment decision or taking any action. Jarden Wealth Limited is an NZX Advisory Firm. A financial advice provider disclosure statement is available free of charge here.
December quarter Consumer Price Index (CPI) annual inflation came in at 2.2%, consolidating near the middle of the Reserve Bank’s 1-3% target band. The outcome was marginally higher than Reserve Bank and market consensus expectations.
Gross Domestic Product (GDP) declined 0. 2% in the June quarter, which was a smaller fall than most economists had penciled in.
In cutting the Official Cash Rate (OCR) by 0.25% to 5.25% the Reserve Bank of New Zealand (RBNZ) Monetary Policy Committee (MPC) has executed a 180 degree turn from its hawkish stance just three months ago
The deciding factor for the MPC’s OCR cut was its view that excess capacity is growing by more than expected, which is seen as pushing inflation down further than it previously thought.
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