Reserve Bank’s Official Cash Rate Review
The Reserve Bank of New Zealand (RBNZ) is set to make its last review of the Official Cash Rate (OCR) for the year on November 26. According to Westpac economists, the RBNZ will be deciding between a 25-point and 50-point cut to the OCR. This decision comes after the RBNZ cut the OCR by 50 points in its previous review on October 8, dropping the rate to 2.50%.
Current Economic Situation
The New Zealand economy is still looking sluggish, with high-frequency economic data suggesting that the hoped-for bounce in GDP in the September quarter may not be materializing. Westpac senior economist Satish Ranchhod notes that the economy is experiencing ongoing weakness, with the construction and retail sectors being particularly weak. Retail spending levels are up only 1% over the past year, indicating very muted per-capita spending.
Economic Indicators
The Westpac Nowcast indicator, which summarizes the trend in economic indicators, points to growth in economic output of just 0.2% in the September quarter. This would be a very muted rise after activity contracted 0.9% in the June quarter. However, businesses have reported that they aren’t going backwards like they did over the past year, and some parts of the country are seeing early signs of a modest lift in demand.
Interest Rate Reductions
The pass-through of interest rate reductions has been gradual to date, but large numbers of borrowers are now rolling on to lower mortgage rates. This will boost disposable incomes over the next 6 to 12 months, which will also boost demand and inflation pressures, albeit from subdued levels. The RBNZ will need to consider these factors when making its decision on the OCR.
Market Expectations
Financial markets are currently pricing in a 25bp cut, with an 8% chance of a 50bp cut. Westpac economists assess the chance of a 50bp cut as lying in the 30-35% range. While some economists expect the OCR to be cut to 2.25%, the possibility of a follow-up 50bp cut in November has not been widely raised.
Conclusion
In conclusion, the RBNZ’s decision on the OCR will be crucial in determining the direction of the New Zealand economy. With the economy still looking sluggish and high-frequency economic data suggesting a muted bounce in GDP, the RBNZ will need to carefully consider its decision. Whether the RBNZ decides on a 25-point or 50-point cut, the goal will be to boost economic growth and inflation pressures, while also considering the potential risks and challenges facing the economy.
