Reserve Bank could pivot to interest rate cuts from July - BNZ

Statistics NZ's revelation last week Aotearoa's economy is performing much weaker than expected has triggered bets on Reserve Bank (RBNZ) rate cuts as early as July. 

Economic data on Thursday showing weaker than expected GDP in the September quarter has heightened BNZ's enthusiasm for Reserve Bank policy easing next year. 

"Our own view is that we'll see cuts to the cash rate around the third quarter of next year," wrote Mike Jones, the BNZ's chief economist. 

"If markets are right, lower retail interest rates from around mid-year would add weight to a second half recovery. By contrast, if RBNZ worries about sticky domestic inflation bear out and the cash rate is held at 5.50 percent all year (or lifted), the economy will be shuffling sideways into 2025," he added. 

That's despite the RBNZ last month making it clear interest rates weren't coming down anytime soon, with cuts not expected until the start of 2025

The central bank raised rates by a half-point and quarter-point in the first two meetings of the year and has left them on hold since. Inflation slowed to 5.6 percent in the September quarter, down from the 7.3 percent peak last year but still well above the RBNZ's 1-3 percent target range. 

But the central bank's guidance "felt a touch strong to us when it was delivered... even more so now in the wake of the crumbling GDP numbers of last week", BNZ said. 

While the economy was in for another challenging year in 2024, BNZ said "there are a few more green shoots to note" and the outlook was "starting to tilt very marginally upwards rather than firmly down". 

BNZ forecasts inflation should hit the central bank's target range by the end of next year. 

Mike Jones.
Mike Jones. Photo credit: LinkedIn

"That would of course be welcome but lower 'inflation' still means rising prices," Jones wrote.  

Cost of living pressures easing, he added, would likely require inflation falling below wage growth. 

"Mortgage rate declines would obviously help too. We reckon there’s a good chance we'll see both [in] late in 2024."