Today’s Quarterly Survey of Business Opinion release has provided the first opportunity to gauge the sentiment of economists towards the present easing cycle in the wake of a challenging environment – uncertainty over the pace of easing in the US following signs of a resilient US labour market, the dilemma posed by President-elect Donald Trump’s proposed tariff policies and possible fiscal stimulus, the surge in oil prices, the fall in the New Zealand dollar, and the steepening in yield curves globally (amidst concerns that residual inflation pressures could prove sticky).
On Friday, a better-than-expected jobs report in the US soured expectations of future rate cuts from the Federal Reserve, with markets pushing out the easing cycle. CNN reported that Bank of America economists now believe the Fed is done cutting rates, although Morgan Stanly analysts still expect the easing cycle to continue, commenting that “The report should reduce the probability of near-term Fed cuts, though our more favorable outlook on inflation keeps us thinking a March cut is still more likely than not,”.
In this environment, it is interesting to see what influence this might have on the Reserve Bank’s decision making, particularly in the wake of the fall in the NZD which will add to inflationary pressures. The consensus is that the Reserve Bank will cut the Official Cash Rate by 50 basis points at their next review on 19th February. The main bank economic teams had this to say following today’s QSBO release:
ANZ Overall message: inflation pressures remain contained. We therefore see nothing in today’s data to shift the RBNZ one way or another from their prior guidance that they’ll cut 50bp in February. (ANZ Research 14 January 2025)
ASB: The Q4 survey showed modest signs of improvement from the dire earlier 2024 readings, but still suggest moderate growth at best, with the economy in need for a growth driver in addition to actual and further cuts in interest rates. Activity metrics were generally on the wrong side of the expansion/contraction divide. The lack of demand/sales is increasingly the largest constraint on firms expanding output. Firms are lukewarm on hiring and are cutting investment, with plenty of spare labour market capacity still evident. This points to further rises in unemployment and possible sub 2% inflation. We expect a 50bp February cut and a 3.25% OCR endpoint, but the issue for 2025 is how much further the OCR will need to be cut. (ANZ Research, 14 January 2025)
BNZ: There are many challenges to its November Monetary Policy Statement forecasts including the Q3 GDP outturn [which recorded a marked slowdown], the surge in oil prices, the fall in the New Zealand dollar, the steepening in yield curves globally, the strength in the US economy and the Trump policy dilemma. By comparison, today’s QSBO will probably just offer some welcome relief and a sense of stability against an otherwise volatile background. There was nothing in today’s QSBO to change our view on anything. Our main themes for 2025 are that the economy will witness a slow recovery as the year progresses, the labour market will continue to deteriorate but at a slowing pace, inflation will remain contained (though not dead and buried), allowing the cash rate to keep falling. (BNZ Economy Watch, 14 January 2025)
Westpac: 2025 promises to be a tumultuous year. The RBNZ’s strongly-signalled 50bps OCR cut in February seems likely to be delivered, especially given that astonishingly weak GDP data for Q2 and Q3 2024. While those data may have overstated the weakness in the economy in the middle of 2024, it is fuel for the argument of MPC doves who will ask why the OCR remains in restrictive territory (by the RBNZ’s reckoning), even after a 50bps February cut to 3.75%. (Westpac Economic Bulletin, 13 January 2025).
Kiwibank: The economic outlook has improved, so long as the RBNZ keeps cutting. (Kiwibank commentary and insights, 14 January 2025).
Overall, the message is that the main bank economists continue to expect the RBNZ to cut the OCR by 50 basis points in February.