Infometrics said the OCR cuts by the Reserve Bank of New Zealand of 50 basis points have struck a dovish tone.
The Reserve Bank has cut the official cash rate (OCR) by a further 50 basis points, taking it to 3.75 percent. The Bank’s OCR forecast track also shows the OCR bottoming out sooner, by early next year, at between three percent and 3.25 percent.
Infometrics CEO Brad Olsen said that Bank has adopted a relaxed position about the increase in inflationary concerns over the last six weeks. The Bank noted the effects of the lower exchange rate and higher oil prices on headline inflation, which have flowed through into an uptick in forecast inflation to 2.7 percent pa later this year, compared with 2.5 percent pa in the Bank’s November forecasts.
However, the Bank stated that the “near-term increase in headline inflation is unlikely to significantly affect wage- and price-setting behaviour given excess capacity in the economy.”
Infometrics also said the Bank has downplayed recent improvements in some economic indicators, stating that “activity in New Zealand remains subdued” and that the “pace [of recovery this year] is expected to be modest, as potential GDP growth is constrained by ongoing weakness in productivity growth and lower net immigration.”
The Bank’s forecasts see no more than 0.6 percent quarterly GDP growth throughout 2025.
The Reserve Bank has remained on track to cut the OCR to 3.25 percent by mid-2025, in line with our forecasts. However, the dovish statement suggests there is a chance of a further 50-point cut, rather than slowing the pace of easing as the OCR approaches neutral and the economy shows early signs of recovery.
Aside from the risk of another 50-point cut, Infometrics has expected the Bank to cut the OCR to three percent in the September quarter this year. This statement has indicated the Bank is relaxed about what it expects to be a temporary lift in inflation due to the exchange rate and fuel prices. The Bank also does not see the acceleration in economic growth later this year as presenting any significant inflationary risks either.
Olsen said that, at this stage, inflation expectations back up the Bank’s view, with most expectations measures moderating in the Bank’s latest Survey of Expectations published last week. However, inflation expectations could easily pick up later this year as headline inflation ticks up, at precisely the time that accelerating economic growth is starting to create more demand-side pressures.
“We see a risk that the Bank is underplaying early signs of the economy’s turnaround, that it is underestimating the pace of the recovery during 2025, and that it is being overly relaxed about the build-up of inflationary pressures later this year,” he said.
“The effects of interest rate cuts to date will take another year to flow through the economy. We see a real chance that faster or more cuts by the Bank lead to another monetary policy overshoot, amplifying the economic cycle again, and necessitating another tightening cycle in 2026.”
Olsen added that the 50-point cut was the right move, and the Bank’s forecast track for the OCR was now more consistent with market pricing.
“But the risk tone appears unbalanced, which could risk overcooking the monetary policy easing and create the need for renewed increases in interest rates in 2026. We think a more measured tone, and slower rate of easing, might be the path of least regret.”
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