Westpac expects RBNZ rate cut as policy debate heats up
Westpac chief economist Kelly Eckhold (pictured) says a turbulent global environment and mixed local data have raised uncertainty around the Reserve Bank’s (RBNZ) policy direction.
However, the bank expects a 25-basis-point rate cut at the RBNZ’s next policy review, with further easing possible.
“It’s been a tumultuous few months since our last update, with plenty of news to ruffle the feathers on all sides of the monetary policy debate,” Ekchold said.
The forecast comes as financial markets increasingly price in cuts following the budget and recent Monetary Policy Statement, both of which reinforced the need for stimulus amid soft growth and fiscal restraint.
Trade uncertainty adds to domestic volatility
Eckhold noted that global trade policy remains in flux, adding volatility to financial markets and economic forecasts.
“Of course, much of the focus for financial markets has been on the changes in global trade policy. On this front we have seen some big swings in both sentiment and markets in a very short space of time, and uncertainty around the path for trade policy in the US and elsewhere remains high.”
At home, the data has been mixed. While economic activity is improving, it remains narrow and vulnerable to setbacks.
“Economic activity is gradually picking up but is still narrowly based and could be prone to setbacks,” Eckhold said.
RBNZ likely to cut OCR next week
Westpac expects a rate cut at the May review, despite debate around the risks of further easing.
“Against this backdrop, we expect the RBNZ will deliver another 25bp rate cut at next week’s policy review. We also expect that they will signal the likelihood – or at least the chance – of some further reduction in the OCR this year,” Eckhold said.
“However, there are some big questions about the extent and timing of future rate cuts, and whether they are even required.”
Hawkish arguments: inflation risks re-emerge
Inflation data showed a recent rebound, especially in food, electricity, and government charges.
“Inflation rose to 2.5% in the year to March, up from 2.2% at the end of last year,” Eckhold said. “Food prices continue to rise rapidly, including a larger than expected 3.7% rise in the year to April.
“We’re continuing to see large price increases in parts of the economy that are less exposed to competition, such as electricity and government charges, including local council rates.”
Inflation expectations are also rising.
“Notably the RBNZ’s own measure of expectations two years ahead posted a large 23bps rise in its latest survey, leaving it at 2.29%,” Eckhold said.
“It’s unusual for the RBNZ to cut rates at a time when inflation expectations are pushing higher,” he said. “Generally, this has only happened in times of crisis such as COVID or the Global Financial Crisis. It’s not obvious we are in such a situation now.”
Refixing mortgage rates could spur demand
Westpac sees a rise in disposable incomes over the next six months as mortgage repricing flows through.
“Over the next six months, around half of all mortgages will come up for repricing... mortgage rates are around 170 to 200 bps lower,” Eckhold said.
“As increasing numbers of borrowers come up for re-fixing over the coming months, many households will see a sizeable lift in their disposable incomes. This positive impulse is large relative to past easing cycles (outside the GFC period).”
Dove’s case: market-driven inflation already contained
While headline inflation has ticked up, market-sector inflation is more subdued.
“Inflation excluding government charges is already low, sitting at 1.8% in the year to March,” Eckhold said.
“Softness in domestic demand and the labour market (including wage growth) means that the more cyclical components of inflation which the RBNZ has a greater influence on are continuing to cool.”
He argued aggressive tightening now could harm the economy unnecessarily.
“If we assume inflation expectations remain anchored, squeezing the market sector of the economy to offset inflation in the government sector might reduce inflation towards 2% more quickly but incur unnecessary output costs and a weaker labour market,” Eckhold said.
Trade risks and slow recovery justify stimulus
Despite recent US tariff pauses, trade tensions remain elevated, particularly with China.
“There are risks of a deeper downturn should negotiations not go well, and especially if growth in China and our other trading partners in Asia is less resilient,” Eckhold said.
“Even if trade negotiations are successful, the new trade landscape is likely to be less favourable for New Zealand exporters.”
Weaker global demand, rising costs, and constrained government spending are expected to weigh on growth.
“Fiscal policy is now entering a contractionary phase, with spending to remain restrained over the coming years and so decline as a share of GDP,” Eckhold said.
“With the balance of supply and demand in the housing market leading to anaemic growth in house prices, the lack of positive wealth effects is also contributing to continued sluggishness in demand and softness in the construction sector.”
Eckhold said monetary policy needs to be clearly stimulatory to support above-trend growth and a timely decline in unemployment
