Interest rate cuts will happen quickly next year

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Kiwibank expected the OCR to be at 4.5 percent by next June, compared to 5.5 percent at present, and 3 percent by the following June. (file image)
Photo: RNZ

Businesses and households are holding on until 2025, which is likely to be a year of “significant” interest rate cuts, Kiwibank says.

It has updated its economic forecasts.

Economist Sabrina Delgado said while it still expected the official cash rate (OCR) to be cut in November – earlier than many other forecasts – it was next year the full impact of a fall in interest rates would be felt.

Kiwibank expected the OCR to be at 4.5 percent by next June, compared to 5.5 percent at present, and 3 percent by the following June.

Delgado said once the Reserve Bank made a choice to cut rates, it would aim to scale right back to a neutral rate – not just ease a bit and see what happened.

“We think once inflation is in the band, it’s not a decision to cut and wait it out. It’s a decision to go back to neutral and restimulate the economy.”

Kiwibank said the Reserve Bank had the economy “in a chokehold” and things would only start to improve once rates began to fall.

“It all comes down to where we see inflation going,” Delgado said. “We know the path for policy and interest rates is pegged to inflation.”

She said inflation should be back in the Reserve Bank’s target band of 1 percent to 3 percent by the third quarter of this year.

“We do see the first opportunity for cuts happening in November. We’re very aware the risks are for a later start, maybe in February. But one thing we are confident in for sure is the direction for interest rates is lower.”

She said everything hinged on interest rates coming down.

Kiwibank expects the OCR to be at 4.5 percent by next June.
Photo: Kiwibank

“Economic activity is really weak. The housing market is struggling to regain momentum because interest rates remain high. The lifeblood of the economy will come back when we see interest rates being cut.”

She said the Reserve Bank could cut before inflation was in the middle of its target band.

“Monetary policy does work with a really long lag. There is a risk that they overshoot if they leave it too long.”

Kiwibank expects the economy to grow just 0.1 percent this year. Delgado said things could still feel worse for households, before they got better.

“Because of the lags we see in the labour market, recessions tend to feel worse at the end.”

Kiwibank expects unemployment to rise to a peak of 5.2 percent in the middle of next year.

“People have been doing it tough but there has been resilience in the economy because of tight labour markets,” Delgado said.

“Once that starts to loosen that’s when there will still be some pain out there… The main message is that things will be better next year. Not that it’s going to be a click and everything will be better all of a sudden, but that’s the outlook.

“The signal that interest rates are coming down will help boost confidence, it is really key. People are gripping on til the end of the year, just holding on.”