OCR: Expectations increase for a 2024 rate cut

Economists aren’t expecting much from the Reserve Bank next week – but forecasts are increasingly leaning towards an official cash rate cut before the end of the year.

Over the course of the last year, predictions for when the first reduction in the OCR might happen have varied.

Initially, forecasts were for later this year. Then, persistent domestic inflation raised worries that a much longer period of higher rates might be required. For a while, there were even forecasts another increase might be on the cards.

But now, consensus is building over the fact that the economy is suffering sufficiently that the Reserve Bank could contemplate a cut this year, not the August 2025 that it currently forecasts.

ASB economists have recently changed their outlook, expecting a cut in November rather than February as they previously forecast.

“The cracks in households are starting to spread – inflation will be next.”

They said the inflation dynamic was changing quickly this year. “Households are starting to buckle more noticeably under the various pressures of high interest rates and high – though easing – living cost inflation.

“To date the labour market has been a bit of a saviour with employment holding up and wage growth relatively stronger. Even that story is starting to change.”

They said rather than the biggest risk for the Reserve Bank being cutting too soon and seeing inflation rise again, the biggest risk was now holding interest rates high for too long and unnecessarily damaging the economy and people’s employment prospects.

BNZ economist Stephen Toplis said the latest Quarterly Survey of Business Opinion “screams cut rates sooner rather than later”.

But he said the Reserve Bank would still want to see inflation within its target band before it pulled the trigger and that could be some time away.

The net 23 percent of businesses that told the survey they intended to increase prices was the lowest since December 2020, he noted.

“It would be a rarity for headline inflation to be outside the target band with this level of intention. Moreover, there is no reason to believe the drop in pricing intentions is yet complete. The momentum is viciously downward.”

ANZ said it expected the OCR would remain at 5.5 percent next week and the central bank would reiterate that it was in “watch worry wait” mode.

But it said the survey data that had come out since the last OCR update was on the side of interest rate cuts sooner.

“That is likely to be acknowledged in the review, but we doubt it’s sufficient to bring about a meaningful change in policy rhetoric from the Reserve Bank.”

ANZ said it still expected a cut in February but the risks were “tilting towards earlier” – but that would require some data points to come in much lower than Reserve Bank expectations. “That’s not far-fetched but it’s far from a fait accompli.”

Westpac said the Reserve Bank would next week probably emphasise the risks to consumer spending and inflation that could arise from the Budget, balanced out by the economy stalling and the labour market easing.