“We believe the RBNZ should be in a position to start cutting interest rates early in 2024. We are firm in our belief that rates should be marked lower in the first half of the year.”
Kiwibank chief economist Jarrod Kerr
See full article from Interest.co.nz below:
If the economy develops as expected, with very weak economic activity and falling inflation, then ‘we should start talking more about rate cuts as we head into next year’, Kiwibank economists say
Kiwibank economists are still adamant the Official Cash Rate will be cut in the first half of next year – despite the Reserve Bank indicating now that there’s no cuts likely till early 2025.
The Kiwibank economists – chief economist Jarrod Kerr, senior economist Mary Jo Vergara and economist Sabrina Delgado said in the bank’s latest First View publication said they had been “surprised” to see the RBNZ push out its forecast track for the OCR when releasing its latest Monetary Policy Statement last week.
“Over the last two MPSs, the RBNZ made two steps forward, by lowering the OCR trajectory in recognition of the cooling economy. Last week’s lift was a giant leap backwards,” the economists said.
Having lifted the OCR rapidly from just 0.25% as of the start of October 2021 to 5.5% in May of this year, the RBNZ is now not forecasting cuts to the OCR till the first quarter of 2025.
The Kiwibank economists said the RBNZ “wants the full force of recent tightening to hit households” in coming months.
“Thoughts of rate cuts were deliberately squashed, in order to keep wholesale rates, and therefore mortgage and other lending rates, high and dry,” they said.
The economists had previously called for an OCR cut as early as February of next year, but now concede this “looks increasingly unlikely”.
“We need to take the RBNZ at their word here. And they’re saying clearly enough, that the time required to see inflation fall back comfortably towards 2% will take a lot longer than our forecasts.”
Annual inflation as measured by the Consumers Price Index peaked at 7.3% in mid-2022, but has since started falling only slowly, getting down to 6.0% as of the June quarter this year.
The Kiwibank economists say they have “reluctantly” tweaked their view.
“We still expect the next move to be a rate cut. And we expect a cut long before most commentators and the RBNZ themselves,” they said.
“We now pencil in the first cut in May next year. And it’s more to do with direction, rather than precise timing. If the economy develops in line with our forecast, with very weak economic activity and falling inflation, then we should start talking more about rate cuts as we head into next year.
“We believe the RBNZ should be in a position to start cutting interest rates early in 2024. We are firm in our belief that rates should be marked lower in the first half of the year.”
In BNZ’s latest Eco Pulse publication, BNZ chief economist Mike Jones said despite the RBNZ’s “subtle nod” last week to the risk of a higher OCR, “our central view is that it will remain where it is at 5.50% for some time”.
“This being so, our messaging on both mortgage rates and house prices hasn’t changed. Notably, the Reserve Bank’s own house price inflation forecasts were given a shunt up towards our own in last week’s statement. We retain a stronger view overall (7% rise over calendar 2024),” he said.
“We think mortgage rates are in the process of peaking, but the timing of any meaningful falls is sufficiently distant (and uncertain) that it makes sense to budget on rates staying around current high levels well into next year.”
Jones also said “additional upward tweaks” in mortgage rates can’t be ruled out should the recent “lurch higher” in wholesale interest rates continue.
“Since the Reserve Bank declared the tightening cycle over in May, two-year wholesale (swap) rates have risen a further 40bps [basis points],” he said.
“From early 2024, we should see mortgage rates start to nudge lower assuming our view of mid-year cuts in the Official Cash Rate is close to the truth. Declines are expected to be more pronounced in the shorter-term one- and two-year rates. For this reason, fixing at shorter terms, as appears to be the most popular strategy at present, continues to make sense to us. That’s even with three-year fixed rates being about 70bps lower than average one-year rates.”
