Monetary policy review

From considering a raise to hinting at a cut

10 Jul 2024

Our take on the latest Monetary policy review (Wed 10 Jul 2024)

OCR stays at 5.50%

Monetary policy restraint "will be tempered over time"

Could the OCR be cut before the end of the year?

The official cash rate (OCR) was held at 5.5% at today’s review, as expected. However, in contrast to May’s review, when the Monetary Policy Committee discussed increasing the OCR, the Reserve Bank hinted at interest rates being reduced over time if inflation pressures continue to decline as expected.
A combination of recent business and consumer confidence surveys and high-frequency spending data points towards declining economic activity. The Bank acknowledged that some domestic price pressures remain strong, but it is now more confident that these pressures are receding in line with reducing capacity pressures and softer business pricing intentions.
The Bank also sees labour market pressures easing, and there was little reference to the risks around productivity or persistent wage inflation that coloured the previous statement.
The Bank appears to be relatively sanguine about the government’s recent budget. It sees lower government spending already leading to softer demand, but the tax cuts have yet to take place, and their effect on demand is less certain.
The Committee noted it was “confident that inflation will return to within its 1-3 percent target range over the second half of 2024”, which is consistent with our view.

Official cash rate expectations

The Reserve Bank’s habit of flip-flopping and changing the tone of its message from one statement to the next means we remain cautious about the timing of the first cut to the OCR. We are sticking to our view of February 2025 at this stage, but the outlook should become clearer when the Bank publishes forecasts with its next review on 14 August.
We see a growing chance that the Bank cuts in late 2024, a position we expected until recently and only changed because of the gung-ho nature of the Bank’s May Statement. It’s hard not to get frustrated trying to divine how the Committee can pivot its view so substantially every six weeks.
Key data sets in the next five weeks will be the June quarter Consumers Price Index (17 July) and Labour Market Statistics (7 August). This data should help confirm (or not) the trends suggested in the NZIER’s Quarterly Survey of Business Opinion, pointing towards a substantial further softening in inflation and labour market pressures. Non-tradable inflation, currently at 5.8%pa, could be a very important figure in the Bank’s thinking.
Weakness across those indicators might be enough for the Bank to signal in August an interest rate cut before the end of 2024. However, we also note that the Bank’s May forecasts showed no rate cuts until the September 2025 quarter, so bringing the timing forward by 10 months would be a huge change in stance, without any materially different data in the mix.

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