Experts split as weak economy collides with rising prices
The NZIER Monetary Policy Shadow Board has recommended a 25 basis-point cut to the official cash rate (OCR) at the Reserve Bank’s (RBNZ) upcoming August monetary policy statement. This would bring the OCR down to 3%.
The recommendation reflects the board’s view that “the softness in activity and continued slack in the labour market should provide scope for a modest cut in the OCR now.”
While opinions ranged from a 50 basis-point cut to no change, most members favored a moderate reduction.
Diverging views on the size and timing of the cut
Some members argued for a more aggressive approach.
As Kiwibank’s Jarrod Kerr (pictured left) noted, “We should get a cut to 3%, followed by another, and then another, to 2.5%. The case for rate cuts has strengthened as the data weakens. The need for a stimulatory rate is clear, as neutral is not enough.”
Another member even suggested a 50 basis-point cut could be necessary to support the New Zealand economy’s recovery.
However, caution was urged by others. Two members pointed to “the upward trending in near-term inflation” as a reason for RBNZ to be careful with further easing.
“Uncertainty around tariffs and trade add to a situation where inflation is upward trending, inflation expectations remain elevated, and unemployment… is upward trending. On balance, I don’t see a strong case for changing,” University of Otago’s Dennis Wesselbaum said.
Economic weakness and labour market concerns
Several Shadow Board members highlighted ongoing economic challenges as justification for a rate cut.
“GDP is contracting, the labour market continues to weaken, medium term inflationary pressures are limited. This demands further easing from the central bank,” BNZ’s Stephen Toplis (pictured centre) said.
BusinessNZ’s John Pask added, “While inflationary expectations by both businesses and consumers remain elevated, core inflation continues to decline with lower growth prospects and spare capacity in the economy, justifying a further drop in the OCR.”
Sharesies’ Brooke Roberts also pointed to labour market softness: “Inflation is within the target range. Unemployment rate has risen, signalling a loosening labour market. A modest cut now would support demand, ease currency pressures without jeopardising the inflation outlook.”
Calls for caution amid strong commodity prices
Not all members were convinced that more stimulus is needed immediately.
“There are signs that stronger commodity prices and low interest rates are supporting activity,” said Westpac’s Kelly Eckhold (pictured right).
“The worst fears of a marked deterioration in the trade environment seem unfounded, so their role in making the case for further significant easing seems thin. Inflation seems likely to hug the top of the target range this year, limiting the need for further stimulus. It is time to wait and see how the economy responds to low interest rates and strong export returns.”
Outlook for the next year: Mixed views on further easing
Looking ahead, the Shadow Board’s views on where the OCR should be in a year’s time varied widely.
Some members saw no need for further easing, while others argued that more stimulus may be required beyond August.
Boffa Miskell’s Kerry Gupwell summarised, “Overall, it feels like the economy has spluttered to a stall in Q2/mid-year, but the rural sector appears to be the exception. A further cut is justified, perhaps even by 50 basis points, rather than prolonging things.”
Read the NZIER announcement here.
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