Will the Reserve Bank deviate this week from its long run of holding the Official Cash Rate steady at 5.5 percent? Photo: RNZ
There are growing expectations the Reserve Bank will cut the official cash rate when it releases its monetary policy statement (MPS) on Wednesday.
Business leaders, as well as an increasing number of bank economists, were pencilling in a 25-basis-point (bps) cut to the Official Cash Rate (OCR), which would see the interest rate drop to 5.25 percent from the current rate of 5.5 percent.
The OCR had been sitting at a 14-year-high of 5.5 percent since May 2023, after rising steadily from a record low of 0.25 percent in October 2021.
Employers and Manufacturers Association head of advocacy Alan McDonald said the business community had been doing it tough for a number of years and needed a positive signal from the RBNZ.
"I think everyone's just really run out of reserves, financially, physically, mentally. It would be nice to think that - and it's more about the signal than the number - that the reserve bank might do something this side of Christmas. I'm still not optimistic that will happen, but it would be more about the signal, even if it was just, you know, 25 basis points," McDonald said.
Infometrics chief executive and principal economist Brad Olsen said the RBNZ was under pressure to cut the OCR this week, but it would be a departure from the position it took in the May MPS, which was projecting rate cuts from the middle of next year.
"We think it would be too quick of a move, and the bank really does risk losing a lot of credibility that it's already struggling to maintain for its forecast. So we are in that watch, wait and see period," Olsen said.
"The fact that non tradable inflation and a number of other parts of core inflation are still too hot does present some worries and caution, and that's one of the reasons we're thinking that (the cut) won't be August."
Still, the chorus of those expecting to see a cut this week was growing.
BNZ head of research Stephen Toplis said the RBNZ should have already cut interest rates, given current economic conditions, with unemployment sitting at 4.6 percent in the June quarter and expected to rise to perhaps 5 percent by the end of the year.
"We can see from all of the real economy data at the moment is that interest rates at the level, they are a binding constraint. Every indicator has turned negative," Toplis said.
Kiwibank chief economist Jarrod Kerr said a shift in direction was necessary, and recommended the RBNZ begin cutting rates.
"We think they need to cut interest rates. We think the economy has corrected enough. We think inflation sitting back to 2 percent. So look, job done. It's now time to start cutting interest rates," Kerr said.
ASB chief economist Nick Tuffley said the bank had also changed its view on the OCR and expected the RBNZ to begin cutting this week.
"The November MPS is a long way off and the economy is teetering," Tuffley said, adding the markets had been pricing more than 90bps of cuts in 2024 alone.