Monetary policy review

Right move to cut, but impossible to trust RBNZ’s judgement

14 Aug 2024

Brad Olsen

Our take on the latest Monetary policy review (Wed 14 Aug 2024)

OCR cut 25bp to 5.25%

OCR forecast to be 3.75% at the end of 2025

Current inflation estimated at just 2.3%pa

The key numbers...

The Reserve Bank today conducted one of the sharpest monetary policy U-turns on record, as it cut the official cash rate (OCR) by 25 basis points to 5.25%, just three months after considering lifting the rate.
The OCR is now likely to be cut twice more in 2024, reaching 4.75% by the end of the year, before heading to 3.75% at the end of 2025. The Bank’s forecast of the OCR shows a continued and much quicker set of interest rate cuts than previously forecast.
GDP growth is set to be “materially weaker” over 2024 than previously expected, with GDP down a further 1.3% at its worst compared to the May forecasts. The unemployment rate is now set to peak at 5.4%, compared to 5.0% last forecast.
The Bank has also revised lower its inflation forecast, with inflation set to plunge to 2.3%pa in the September 2024 quarter, compared to an expected 3.0%pa for that period in the May forecasts. Although encouraging, this lower inflation expectation is driven by weaker overseas-based inflation, with domestic pricing pressures set to be above 3%pa all the way until the end of 2025.
The Bank pointed towards “a broad range of high-frequency indicators” to justify its view that the economy had weakened more sharply than expected, particularly as key official data such as GDP, inflation, and the unemployment rate had been in line with the Bank’s forecasts. The focus appears to be on indicators such as card spending, traffic volumes, and surveys of manufacturing and service performance.
The Bank also highlighted a moderation of inflation expectations, with two-year ahead expectations easing from 2.33% to 2.03% in the Bank’s latest Survey of Expectations. Across the board, inflation expectations were at their lowest since about mid-2021.

Abandoning one forecast, swapping to another

Official cash rate forecasts

...and our reaction

The complete U-turn from the Reserve Bank means we have reviewed our expectations for the OCR. We now expect further 25 basis point cuts in both October and November this year, and further cuts in most meetings during 2025 to take the OCR to 3.5% by the end of next year.
The Reserve Bank has probably made the right call in starting to cut the OCR, but in doing so, it implies that its view of the economy and its forecasts in May were hopelessly wrong.
Flip-flopping from a raise and no interest rate cuts until August 2025, to then actually cutting in August 2024, raises massive questions about the Bank’s reading of the economy and its forecasts, and frankly makes it hard to trust its judgement. It was clearly wrong about the economy in May 2024, but the yo-yoing in views also means that no one can be quite sure of what’s next, and the lack of accountability is galling.
The Bank has noted that the “pace of further easing will depend on the Committee’s confidence” on inflation moving in the right direction and inflation expectations remaining anchored. But given the shift in tone and forecasts, we retain a little caution about a strong and sustained profile of interest rate cuts. If inflation doesn’t get as low as 2.3%pa in the September 2024, we’re not sure how much anyone would trust the Bank to continue as it meant to with further cuts.

Latest updates

Premium

Monetary policy review

Right move to cut, but impossible to trust RBNZ’s judgement

The key numbers...

Abandoning one forecast, swapping to another

...and our reaction

Latest updates

OCR up for first time in three years, as expected

Split decision keeps OCR at 2.25% for now

Reserve Bank holds at 2.25%, but watches vigilantly

OCR on hold, but set to lift slightly quicker