Economist expects Reserve Bank to slash the OCR

PHOTO: The Reserve Bank of New Zealand (RBNZ). FILE

A prominent economist anticipates that the double dip recession will prompt the Reserve Bank (RBNZ) to enact a substantial one percentage point reduction in interest rates within the current year. This prediction diverges from the market’s expectation of a 75 basis point decrease from the existing rate of 5.5 percent.

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Recent economic indicators underscore the severity of the situation. New Zealand’s Gross Domestic Product contracted by 0.1 percent in the December quarter, marking the second consecutive quarter of decline and officially placing the country in a technical recession. This downturn was primarily driven by sluggish consumer spending, weakened wholesale trade, and an extended downturn in manufacturing.

Betashares, a prominent Australian fund manager, foresees the RBNZ initiating its first 25 basis point rate cut in the third quarter, followed by a cumulative reduction of one percentage point throughout the year. This outlook contrasts with financial markets’ anticipation of three 25 basis point cuts beginning in August, as indicated by the RBNZ’s most recent monetary policy statement, which projected no rate adjustments until mid-2025.

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David Bassanese, chief economist at Betashares, views the current economic landscape optimistically, suggesting that the relatively high interest rates have effectively slowed the economy and curbed inflation. However, he acknowledges the economy’s unexpected weakness and asserts that the recent consecutive negative quarters could have a psychological impact on both households and businesses. Bassanese argues that this scenario strengthens the case for the RBNZ to implement rate cuts in the latter half of the year rather than postponing action until the following year.

Moreover, Bassanese observes a global trend among central banks, noting that they are not necessarily waiting for inflation to reach target rates before implementing rate cuts. Instead, they seek assurance that inflation is consistently trending downward, indicating a more proactive approach to monetary policy adjustments.