Photo: RNZ
"Heads should roll" at the Reserve Bank if it decides to move the official cash rate this month, when economic data has broadly moved in line with its forecasts, one economist says.
Calls have been heating up for a cut this month as the economy looks increasingly weak.
Data on Wednesday showed the unemployment rate hit 4.6 percent in the June quarter, just under economist forecasts of 4.7 percent but in line with the Reserve Bank's most recent prediction.
Infometrics chief executive Brad Olsen said when the Reserve Bank forecast that level of unemployment for June, it was alongside interest rate forecasts that did not include a drop in the official cash rate (OCR) until August 2025.
"Unemployment has done roughly what they thought, inflation is slightly better than they thought, non-tradeable inflation slightly worse … and [people think] they're going to move interest rates a whole year early?
"Heads should roll at the Reserve Bank if that's the case, because they obviously don't understand what's happening in the economy. On previous forecasts, they were saying these conditions would merit interest rates holding a lot longer. We're quite literally at a complete loss as to what might happen next week."
Infometrics chief executive Brad Olsen. Photo: RNZ / Samuel Rillstone
Both BNZ and Kiwibank have called for an August cut on the basis of weakness in the economy.
"Is there an argument for cutting next week? Absolutely," Olsen said.
"But this is also the state of the economy that the Reserve Bank said didn't warrant relief until this time next year... our official forecast is for a February cut. We don't think that's viable but we don't know yet how the Reserve Bank responds to all this."
He said it was possible the Reserve Bank could use the August update to signal rate cuts were coming earlier, and then potentially move 50bps in November.
"We could see something in August but … the turnaround job that would be on where they currently are, it would suggest a monumental shift … it's almost impossible to comprehend."
BNZ economists said the economy was "buckling under the pressure" of the tight monetary conditions, as well as falling migration, government cutbacks, rising unemployment and reduced investment activity.
"Business profitability is coming under extreme pressure as rising input costs can no longer be passed on through heightened selling prices. This is a general theme but, in particular, we are getting increasingly concerned about what the rising cost of energy is doing to increasingly marginalised energy intensive industries.
"Additionally, we are seeing pressure on sectors that have, until recently, been doing relatively okay such as, for example, the accommodation sector with Hotel Data NZ reporting that revenue per available room fell an annual 36.2 percent in Wellington in July and 20.9 percent for Auckland."
Falling commodity prices and geopolitical tensions were also adding pressure, they said.
"We strongly believe the Reserve Bank should be easing monetary policy as soon as possible. Indeed, we are on record as having said that it should already have done so. Given the lags between rate moves and their impact on the economy, and the current parlous state of New Zealand, we strongly advocate that the bank starts a progressive easing cycle from the August meeting."
They said they would be quite confident about the prediction of an August shift if the bank had not surprised the market by hinting at increases in May.
"That shift completely threw us as we could see no justification for it. The reversal of that view in July seemed sensible and we can only assume that in the course of time the RBNZ will see the May shift as a mistake. Be that as it may, the bank's propensity to surprise leaves us with a huge degree of nervousness about our call."
But they said the expected rate cuts should start this month and eventually bring the OCR down to 2.75 percent.
"Ironically, while our call may seem a tad aggressive it's not as aggressive as the market is currently pricing. The market currently has 100 basis points of cuts by November compared to our 75. We think this unlikely."
Kiwibank economists also said a cut in August was the right thing to do, followed by a cut at every meeting until the cash rate hit 2.5 percent.
"The economy needs support."
If the bank held off, it would cause a spike in wholesale rates, they noted, which could be "brutal" for hedge funds that had invested on the expectation that rate cuts would happen more quickly than forecast.
"What we think the RBNZ will do, is somewhere in between. We're not convinced the RBNZ will pull the trigger next week. They should. But it's still unlikely. It would be hard to go from pushing out rate cuts and raising the probability of rate hikes in the May MPS, to cutting in August. There's a credibility issue for the RBNZ's forecasting team.
"The RBNZ could always argue 'when the facts change...' but to be brutally honest, the facts changed long ago. They are likely to cut this year. Our November pick looks a little outdated given the move in markets. But the risk for traders is heavily tilted to a sell off, and large pop higher in rates."