"Get it done. Get to 2.5% ASAP," Kiwibank economists say
Kiwibank economists say it has become “crystal clear” that the New Zealand economy is not recovering and that the Reserve Bank (RBNZ) must act with bigger cuts.
“The Reserve Bank need to do more. And more we will get,” Kiwibank’s chief economist Jarrod Kerr, senior economist Mary Jo Vergara and economist Sabrina Delgado (pictured, left to right) wrote. “We now expect a 50bps cut in October, followed by a 25bps cut in November. The cash rate should end the year at 2.25%. From there, we think there’s about a 50/50 chance of a further move to 2% in February.”
Weak GDP triggers forecast shift
The call follows a shock 0.9% GDP contraction in Q2, far worse than the 0.3-0.4% decline expected by most economists and RBNZ.
“It’s saddening to see an economy still contracting after last year’s deep and destructive recession,” the Kiwibank economists said. “We fell into a hole last year. And we’ve only dug ourselves deeper. Over the year, the economy has shrunk a further 0.6%.”
On a per capita basis, activity looks even weaker.
“Economic growth on a per person basis contracted 1.1% over the quarter alone and is down 1.3% from June last year,” they said.
Other banks have also shifted their stance. Westpac chief economist Kelly Eckhold described the GDP result as “a significantly weaker outcome than expected,” saying it suggested the RBNZ has more slack to consider. ASB now expects a 50bp cut in October and another 25bp in November, taking the OCR to 2.25% by year-end.
OCR cuts seen as urgent
Kiwibank said the GDP result proves the RBNZ has not delivered the right monetary policy setting.
“We have been advocating for a 2.5% cash rate for over two years,” the economists said. “And now it is crystal clear that current monetary policy settings, with a 3% cash rate, are not enough.
“We are advocating and expecting a 50bp move in October. Get it done. Get to 2.5% ASAP. No more time for mucking around. Then get to 2.25% by year end. And keep your mind open. A further move to 2% remains a possibility.”
Eckhold also pointed out that at RBNZ’s August meeting, two Monetary Policy Committee members already supported a 50bp cut.
“Based off this data, you’d argue that if they were to meet today, those arguing for the 50-basis-point cut would be more emboldened,” he said.
Data watching into summer
Kiwibank said the February decision will depend on how the economy performs over summer.
“This summer will be an important time for data watching,” the economists said. “Will the housing market pick up? Will consumer confidence lift into consumption? And will business confidence translate into activity? It will all feed into the February decision. We hope it will.
“It’s time for leadership out of the RBNZ. And we’re due to learn of the new RBNZ governor. Who we hope will focus on transparency and credibility.”
Westpac also noted that the economy may rebound in coming quarters. The March GDP result was revised up to 0.9% growth, and a 0.6% rise is forecast for Q3. Eckhold said Q2 was more of a “bumpy profile” than the start of a new downturn. He added that lower interest rates should support housing, consumption and investment through 2026.
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