(Bloomberg) — New Zealand’s central bank will cut interest rates by half a percentage point at each of its two remaining policy meetings this year as risks mount of inflation undershooting its 2% target, economists said.
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After starting its easing cycle with a quarter-point cut to 5.25% in August, the Reserve Bank will pick up the pace, lowering the Official Cash Rate to 4.75% on Oct. 9 and to 4.25% on Nov. 27, economists at all five of the nation’s largest banks said.
“The containment of inflation is the Reserve Bank’s goal, and the vast majority of the data now say that this objective has been achieved,” said Stephen Toplis, head of research at Bank of New Zealand in Wellington. “Moreover, there is a growing body of evidence that says annual inflation could soon fall below the 2% mid-point of the Reserve Bank’s target band.”
After overstimulating the economy during the Covid-19 pandemic, the RBNZ may now have overdone its tightening. Gross domestic product contracted in the second quarter, unemployment is rising and house prices are falling as high borrowing costs suppress demand.
“Overly restrictive monetary policy has inflicted much pain and tamed the inflation beast,” said Jarrod Kerr, chief economist at Kiwibank in Auckland. “Households and businesses are struggling. Interest-rate relief is required now.”
Economists called for deeper rate cuts after a business confidence survey this week showed a sharp drop in the number of firms intending to raise prices, as well as increased slack in the labor market that should damp wage growth.
In its Quarterly Survey of Business Opinion, the New Zealand Institute of Economic Research said a net 7% of firms plan to increase prices, down from a net 23% in the previous survey. A net 22% of merchants lowered selling prices in the September quarter, NZIER said.
Abrupt Change
The US Federal Reserve began its easing cycle with a half-point reduction last month. But a shift to bigger cuts would represent another abrupt change of stance for the RBNZ.
It said in May it wouldn’t start easing policy until the second half of 2025 and after its Aug. 14 pivot, Governor Adrian Orr said the bank intended to move “calmly” and at a “measured pace.”
“We are getting increasingly concerned by just how tight monetary conditions are, and how long they would remain restrictive if the RBNZ took a measured approach to easing,” said Nick Tuffley, chief economist at ASB Bank in Auckland. “Inflation pressures look set to shrink very soon.”
Annual inflation was 3.3% in the second quarter and the RBNZ expects it to have slowed to 2.3% in the third — putting it back within its 1-3% target band for the first time since early 2021.
But Toplis said BNZ now expects the annual rate to drop to 2% by March and to 1.7% by the end of 2025, adding “the balance of risk is increasingly to the downside.”
To be sure, business confidence is rising, boding well for an economic recovery next year, and some economists said the RBNZ may want to see latest inflation and labor market data due after its next rate decision before stepping up the pace of cuts.
The central bank’s Oct. 9 decision is also a review, with no press conference or new forecasts. It typically prefers to make significant policy shifts alongside a quarterly Monetary Policy Statement so that it can fully explain its change in thinking.
Of 17 economists surveyed by Bloomberg, 13 expect a 50 basis-point reduction to the OCR next week, while four predict a 25-point move. Investors see a 75% chance of a 50-point cut, swaps data show.
–With assistance from Tomoko Sato.
(Updates with economist survey in final paragraph)
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