The Reserve Bank of New Zealand (RBNZ) is expected to implement more aggressive rate cuts in response to pressure on growth. Standard Chartered’s macro analysts, Bader Al Sarraf and Nicholas Chia, anticipate two 50bps cuts in Q4-2024, which would bring the OCR down to 4.25% by the end of 2024. They also foresee a total of 125bps of cuts in 2025, with the OCR potentially reaching 3% by the end of that year. As inflation is expected to decline further, the RBNZ’s focus has shifted towards stimulating growth.
The Overton Window has shifted towards the possibility of 50bps cuts from the RBNZ. This adjustment in forecast is based on the belief that the current economic landscape necessitates a more proactive approach to monetary policy. With inflation projected to fall within the target band of 1-3%, the primary concern is the sluggish growth outlook. By front-loading rate cuts, there is hope of preventing prolonged economic stagnation. The end-2025 OCR forecast has been revised to 3.0% to facilitate a quicker path to a neutral OCR, estimated between 3-3.5% by the RBNZ.
It is likely that the RBNZ will stress the importance of taking decisive action to alleviate economic pressures. Delaying rate cuts could result in more severe economic downturns, prompting the need for immediate relief measures. Governor Orr has indicated that discussions within the RBNZ have considered starting the easing cycle with 50bps cuts, although 25bps cuts were selected initially. Given the trajectory of economic data, there is now a greater justification for transitioning to 50bps cuts as seen in previous policy easing cycles.
With the backdrop of poor economic momentum leading to a negative output gap, there is downward pressure on inflation. This, in turn, raises the likelihood of the RBNZ implementing more aggressive easing measures. The current economic conditions heighten the risk of prolonged economic challenges, making it imperative for the RBNZ to act swiftly and decisively. The consensus among analysts is leaning towards a more assertive approach to monetary policy in order to address the existing economic vulnerabilities and prevent exacerbated contractions.
