ASB forecasts Reserve Bank may need to make deeper OCR cuts
'Really, what it's doing, is to put more onus on the Reserve Bank to try to provide more support to the economy. Trimming operational spending increases will result in a more contractionary impulse.
'As a result, the Official Cash Rate (OCR) will be lower than it would otherwise be.'
The RBNZ has previously signalled the OCR to fall to a neutral rate about 3% by the end of the year, but noted in its April decision there was much uncertainty and future cuts would be influenced by medium-term inflation expectations continuing to fall.
Smith said the Government's Budget cut would trim about 0.3% off the value of the economy, which would be a dampener on an already struggling economy.
That would help ease possible inflation pressures, but raised the prospect the RBNZ might need to support the economy with interest rate cuts and cheaper borrowing costs.
But too much stimulation can cause inflation, while inflation risks are raised by tariffs and trade wars, justifying a high OCR.
BNZ head of research Stephen Toplis said 'Trumpflation' — a simultaneous mix of rising inflation and poor growth caused by higher tariffs — was causing leading central banks around the world headaches in forecasting and pointing to their interest rate strategies.
The RBNZ might find itself following the lead of the Bank of Canada and the European Central Bank in not issuing guidance on interest rates in the May 28 monetary policy statement, he said.
Slowing growth and rising inflation — stagflation — is not in the playbook, and will have the RBNZ dusting off one of its favourite soundbites — 'least worse choice'.
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