Calls grow for Reserve Bank to slash interest rates

A growing number of commentators are calling for the Reserve Bank to cut the official cash rate by 50 basis points next week – and for rates to come down much faster than previously predicted.

Kiwibank, ASB and HSBC now say a 50 basis points cut is likely in October – and BNZ expects one in November.

Westpac and ASB then expect another 50bps cut in November, and Kiwibank expects one in February.

“I’m calling quite strongly for two 50s,” Kiwibank chief economist Jarrod Kerr said.

“Businesses and households need rates to keep falling, they need the Reserve Bank to maintain momentum.

“The only way it can do that is to deliver 50 – the market has pretty much got that fully priced in now, if they don’t there’s going to be a spike in wholesale rates.”

He said cuts would also help to bring down the currency, which would help exporters, and particularly tourism, heading into the summer season.

HSBC said the recent Quarterly Survey of Business Opinion was a key data point, highlighting weak demand and excess capacity – as well as easing price pressures.

BNZ said the cash rate was “clearly above neutral” at a time when it did not need to be.

“On this basis we think the Reserve Bank should take the opportunity to return the cash rate to near neutral as soon as is practical.”

BNZ’s economists said as long as the next consumer price index update indicated inflation was under control, a 50bps cut in November would make sense – but they were not ruling out a cut of that magnitude next week, as well as November and February.

“The main message here is that we anticipate the cash rate to be at least 125 basis points lower than where it is now by the end of April next year.”

Westpac chief economist Kelly Eckhold agreed the QSBO data indicated that inflation would be at or around 2 percent quite soon.

“That means for the first time since 2021, inflation is properly under control in a headline sense … the Reserve Bank should be able to better afford to be more focused on other things and the other things to focus on are really the economy. It’s obviously operating below potential.

“It’s harder to make the case to keep interest rates as far above neutral levels as they currently are.”

He said central banks around the world had started changing their strategy by more than the data was changing.

“That reflects increased confidence that inflation is going to be at or near targets, and the Reserve Bank has good reason to have similar confidence.”

How does our post-Covid interest rate hike compare?

Kerr said central banks would do their own thing “here and there” but when there was a significant global economic shock, they all tended to react in the same way.

During the pandemic, governments were “doing their thing”, he said, and central banks were “slashing interest rates and printing money”.

The Reserve Bank was the first to increase rates but others had cut earlier, Kerr said.

“Most central banks are cutting and heading south, they will all take monetary policy back to more neutral levels next year.

“The Reserve Bank went in August by 25, then the Federal Reserve came in September and delivered 50 – they’ve got a lower cash rate than us right now.”

Eckhold said the response had been different to Australia’s but was similar to Canada and the US.

“They’ve all started to cut interest rates and in most cases they have cut by more than the Reserve Bank has and are forecast to do significant interest rate cuts between now and March next year.

“If I do that cross-country comparison, it’s easy to conclude the Reserve Bank has got a fair amount of work to do if we are to keep pace with what our peers are doing.”

Were the interest rate cuts – then hikes – too much?

Kerr said in retrospect, economies around the world had been overstimulated by low interest rates.

“They stimulated a whole lot of demand coming out of Covid at precisely the time when supply was restricted.

“China wasn’t open for business, ports were closed – it was a disaster that led to massive inflation. Central banks found themselves having to reverse and not only take away the stimulus they had pumped through but make policy quite restrictive.”

He said in the first half of the pandemic, “everyone did their jobs remarkably well”.

Both the government reaction and the Reserve Bank response had helped the country, he said.

The Reserve Bank had supported financial markets that were showing signs of seizing.

“We know what happens when financial markets seize – we couldn’t let that happen again.

“The first half of the response was brilliant, we had fiscal and monetary policy working in harmony and that proved to be quite potent – more potent than we thought.”

He said it was when the Reserve Bank started talking about the possibility of negative interest rates that things stopped working so well.

A negative rate of -0.5 percent was being talked about, which would have had “ridiculous” consequences, he said.

“They went too far, for too long and did quantitative easing which was great but in hindsight they did too much and ended up overstimulating the economy.”

But he said overstimulating the economy was better than not doing enough.

“We know we can rein inflation back down, it just requires higher interest rates. Had we fallen into more of a depression and deflationary spiral, it is very hard to come out of those. Of all the mistakes to make, you want the mistake of overstimulating because you can rein that back in. Not doing enough could have been a lot more carnage.”

BNZ said they had “long argued” the Reserve Bank had been slow to cut rates in the face of an “imploding economy”.

Eckhold said interest rate policy had been too easy even in 2019, and through the Covid period.

“That necessitated offsetting tightening that was more than would have been the case if it had not been as easy back in that earlier period.

“I hope that next year the Reserve Bank learns something from that experience and doesn’t end up triggering another big cycle here by cutting interest rates by too much into stimulatory territory, unless it’s very much justified. Otherwise we just start the whole process again.”