- The OCR looks set to end 2025 at 3.25% – lower than previously thought.
- We continue to see a 50bp cut in February but now think it will be followed up with 25bp cuts in April and May 2025.
- GDP printed sharply lower in Q2 and Q3 2024 – falling a cumulative 2.1%.
- The RBNZ is likely to estimate a weaker starting point for the output gap – even after accounting for upward revisions to historical GDP.
- We still see growth turning modestly positive in Q4 as higher frequency indicators suggest.
- The degree of pick up that occurs will be critical in determining the size and number of cuts that occur after February.
Weaker starting point implies a more pressing case to ultimately cut further.
Recent months have seen accumulating evidence that the economy has started to turn the corner, with the significant cuts to the OCR made by the RBNZ since August supporting consumption, investment and the housing market. Today’s ANZ Business Outlook survey provided further evidence of that turnaround, as did earlier data this week on the service sector PMI and our own consumer confidence survey. Forward indicators of housing market activity also look more encouraging.
However, today’s GDP data tell us that this recovery is following a much steeper downturn in the middle quarters of this year. The cumulative 2.1% fall in GDP over the June and September quarters were much more than had been thought – indeed, outside of Covid, the steepest two-quarter downturn since 1991 – and tell us that past interest rate increases were biting harder into the economy than generally appreciated.
A full analysis of the GDP data will be released later today. However, our initial read of this data strongly suggests the RBNZ will be even more confident that more interest rate cuts will be required after February 2025. GDP growth was revised higher in 2022 and 2023, implying stronger productivity growth over that period than estimated previously. Even so, the weaker than expected growth in mid-2024 means that the economy is likely to be starting from a position of greater excess capacity than the RBNZ previously thought. So even though today’s data has no bearing on the recovery that we now believe to be underway, that recovery will take longer to remove the excess capacity now evident in the economy.
All else equal, that implies slightly less pressure on domestic inflation. Hence the RBNZ will likely be more confident that it can continue to ease policy and that the case for moving policy closer to a fully neutral setting is strengthened. The RBNZ’s view is that the neutral OCR is around 3% – this data will likely tell them they need to get there faster. Likely, they will want to be there by mid- 2025. All else equal we can see their revised forecasts in February reflecting that view.
Of course, all else may not be equal. The exchange rate is appropriately falling sharply and there are many unknowns in how the global environment, terms of trade and trade environment more generally will evolve.
But for now, it looks more likely that the OCR will trough a bit lower than previously thought. Following a 50bps rate cut at the 19 February meeting, we have pencilled in an extra 25bp cut in the April meeting to join the one already envisaged in May 2025. This will take the OCR to a trough of 3.25%.
Ahead of the RBNZ’s next meeting in February, there are several key pieces of domestic data that could be important for the RBNZ policy stance and our own forecast. That includes the Quarterly Survey of Business Opinion on 14 January, the CPI on 19 January and the Q4 labour market update on 5 February. Adjustments to the rates outlook in both directions are possible.
We have not revised our view of the neutral OCR – which remains at 3.75%. This means that the key consequence of this data is more stimulatory conditions by the end of 2025. That also lays the ground for an extra increase in the OCR later in 2026 to bring the OCR back to neutral levels. Hence, the view is starting to look a lot more like a normal interest rate cycle.
Our view remains that the mix of financial conditions is likely to tilt towards more easing being delivered in the form of a weaker exchange rate. Today’s FOMC meeting seemed to solidify the view that US interest rates will remain higher than seen pre-Covid, even as New Zealand short rates head down. We will reevaluate our exchange rate forecasts in the New Year once a bit more data becomes available. Fair to say though, downside risks to our published NZD/USD and Trade Weighted Index forecasts exist.
