Westpac’s chief economist has thrown a cat among the forecasting pigeons by saying the Reserve Bank (RBNZ) should not cut the benchmark official cash rate (OCR) at next week’s monetary review.
Kelly Eckhold said he expected the RBNZ will go ahead with a smaller sized cut of 25 basis points to 3.5%, because it had already strongly hinted a further cut would happen when it reduced the OCR in February by a third consecutive 50 point cut.
But he has questioned whether another cut is needed or should be delivered right now.
“This OCR cut is likely the wrong thing to do.”
Eckhold said recent numbers showed an improving economy, but also clear inflation pressures.
“Given the mandate is solely focused on inflation, it’s hard to make the case for cutting rates at every meeting from here.
“A cut at the May Monetary Policy Statement is likely still to be justified. But it’s less clear further cuts would be required from there.”
Forecasters and financial markets have been betting on a slowdown in the size and pace of cuts, but strongly back 25 basis point cuts in April and May, with opinion split on a third cut to 3% by September.
Plenty of slack, economy needs bolstering
The argument for more and deeper rate cuts is based on the view the economy is only just crawling out of recession, the recovery is tepid, and there is plenty of economic slack.
“A 25 bp cut this month looks baked in,” ANZ chief economist Sharon Zollner said.
“The housing market is going nowhere fast, consumer confidence is in the doldrums, the labour market recovery is fairly sluggish, and the lift in retail spending is gradual.”
BNZ head of research Stephen Toplis said the labour market would likely weaken further and there remained the uncertainty about the fallout from US tariffs should they eventuate.
“The only real point of interest remaining in the New Zealand story is when will the Bank stop cutting.”
He expected the cash rate to end up at 2.75%, at the lower end of forecasts for what is the “goldilocks” neutral level for the OCR.
He said the abrupt departure of former Governor Adrian Orr last month may also have some bearing on next week’s decision.
“At the margin, because the RBNZ is awaiting the appointment of a new governor, it would be reasonable to expect it would be a bit more cautious in its decision-making than might otherwise be the case,” Toplis said.
