Reserve Bank Governor Adrian Orr. Photo: RNZ / Dom Thomas
Forget arguing about whether the Reserve Bank will cut the official cash rate (OCR) by 25 or 50 basis points (bps) this week. It should go for a full 75bps and reduce the rate to 3.75 percent - from 5.25 percent at the moment - by Christmas, one fund manager says.
Greg Smith, head of retail at Devon Funds, said it was not what he thought the Reserve Bank would do, but what it should do, given the state of the economy.
Inflation was already back at the Reserve Bank's target midpoint and was likely to be below 2 percent by the end of the year.
"There is therefore a strong case for official rates to already be at neutral, which the Reserve Bank estimates to be 3.8 percent in their short-run horizon.
"With the official cash rate at 5.25 percent currently, there is arguably the case that official rates should be below neutral already, with a 0.75 percent reduction needed not only at the meeting this week, but also at the one in November."
He said he wondered why everyone was debating whether it should be a 25 or 50bps cut.
"Is it just because everyone else is cutting by that much? Shouldn't we be thinking about what we need to do?"
Sentiment indicators had improved but conditions were still "grim", he said.
In the latest Quarterly Survey of Business Opinion, 31 percent of firms reported a decline in activity in their own business in the September quarter, the weakest since the second quarter of 2020.
"Confidence about the future is one thing, but so are actions and intent - hiring intentions are the lowest since 2009. Meanwhile household wealth is also soft, with the property market continuing to face headwinds. Consumers are becoming more confident, but from a very depressed base.
"The pain of general cost of living pressures is clearly being exacerbated by high interest rates. Early KiwiSaver withdrawals in August exceeded $183 million, and are 38 percent higher than a year ago. Of this total, $38m was because of financial hardship."
He said there was a real risk that unemployment could be escalating faster than the Reserve Bank predicted, while inflation and economic growth fell more quickly. Cost-cutting by big firms such as Spark and Fletcher Building was likely to lower employee numbers. The BWA Insolvency Quarterly Market Report showed the highest number of business failures in a quarter since 2016.
"The Reserve Bank is expecting the flatlining economy to contract in the third quarter - by 0.2 percent quarter on quarter, but even this outcome may be looking too optimistic.
"We visit many businesses and it is clear that the economy is cratering. Pressures faced by big business are also having knock-on impacts to smaller companies... So should the RBNZ be hitting the 'panic button' on the economy?"
He said it would not be out of line with other central banks.
Greg Smith. Photo: Devon Funds / Supplied
The Federal Reserve eased rates by 50bps last month, a drop that surprised the market. But Smith said New Zealand's economy was in a worse position.
" US non-farm payrolls grew by 1.5 percent year on year in August. NZ filled jobs were down by around 0.5 percent year on year in July. The US unemployment rate was 4.2 percent in August 2024 while New Zealand's June quarter unemployment rate was 4.6 percent."
Australia's economy was also stronger - still growing the June quarter - and unemployment was lower. Retail sales were growing across the Tasman, too.
Smith said the Reserve Bank had the opportunity to "get ahead of things".
"Why is there even a debate?"