Major bank forecasts Reserve Bank may need to cut OCR deeper
The Reserve Bank may have to cut its benchmark cash rate even further to support the economy after the Government said it would slash the amount available for new policies to $1.3 billion, according to an economist.
Finance Minister Nicola Willis in a pre-budget speech said the May 22 Budget would be no "lolly scramble" with any increase in spending going to targeted priorities in health, education, and defence, with some modest support for business growth.
ASB Bank senior economist Mark Smith said the Government had a clear intention of getting its house in order, and in doing so would reduce its stimulus for the economy.
"Really, what it's doing, is to put more onus on the Reserve Bank to try and 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 around 3% by the end of the year, but noted in its April decision that 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 cut 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 of one of its favourite soundbites: "Least worse choice."
By Jeffrey Halley of rnz.co.nz
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