Inflation expectations in the New Zealand economy are headed in the right direction and interest rate relief is on the cards for the second half of 2024, according to Rabobank Senior Market Strategist Ben Picton.
Speaking at an event for Rabobank’s food and agribusiness clients in the Waikato last night, Mr Picton said the bank’s view is the Official Cash Rate (OCR) has peaked at 5.5 per cent and two rate cuts will be delivered by the Reserve Bank of New Zealand (RBNZ) in the second half of 2024.
Providing the basis for the bank’s forecast, Mr Picton said a key factor was the recent slump in New Zealand economic activity.
“We have come through this period where the market was very constrained by the effects of the COVID -19 pandemic. We saw the supply side was under a lot of pressure and we saw demand was being juiced up by very low interest rates and lots of government spending, much the same as everywhere else around the world. And now the economy is kind of in transition. It's rebalancing,” he said.
Rabobank Senior Market Strategist, Ben Picton
“New Zealand did record a technical recession early in 2023, and then the last quarter that we actually have data for, which is the third quarter of 2023, showed a contraction in the size of the economy as well. So we expect that when we get the data for the last three months of 2023, that it could show another contraction, which would be another technical recession.
“This has helped to bring headline inflation down rapidly. Year-on-year inflation fell to 4.7 per cent at the end of 2023, and inflation of just 0.5 per cent in the fourth quarter was very encouraging. However, there is still some way to go to reach the midpoint of the RBNZ’s one to three per cent target range.”
Mr Picton said higher unemployment also supported the bank’s view, despite recent data highlighting the labour market was responding to tightening monetary policy slower than expected.
“We have seen New Zealand unemployment rising over recent quarters, but the most recent data for quarter four of last year did come in a bit under what most economists and the RBNZ were expecting,” he said.
“And what that indicates is that the labour market is a lot more resilient than what economists had been predicting. And when you have a tighter labour market you have higher wages growth and higher aggregate demand and, right now, the RBNZ wants that aggregate demand to drop lower.
“So the RBNZ will be a little concerned about this, but there is softness beneath the headline figure, and overall we think unemployment will rise at a fast enough rate to support our view.”
An additional factor supporting the bank’s interest rate expectation, Mr Picton said, was the significant time lag associated with monetary policy cuts.
“It can take a full two years for the full impacts of rate increases to take effect,” he said. “So we’re only now just starting to feel the full effects of the first rate hikes from late 2021 and early 2022, and any cuts made in the second half of this year won’t be fully felt for a long time.”
Risks to the forecast
In addition to a resilient labour market, Mr Picton identified accelerating consumer spending and the Red Sea conflict as further threat to the bank’s forecast.
“We have seen consumer spending has been under pressure since early 2022 with the real turnover of goods and services actually shrinking. But if we start to see that growing again, then that indicates that demand is again growing versus supply. So that could potentially lead to a delay in cuts or even another hike. So that's a risk,” he said.
“Another threat is what's happening in the Middle East and the disruption to global trade from the Houthi rebels attacking shipping in the Red Sea which is adding costs to international supply chains.
“And for a country like New Zealand, a small open trading economy that imports a lot of goods from the rest of the world, if we start to see inflationary pressures on internationally- traded goods, now that is potentially a risk to the trajectory of inflation in New Zealand that might delay rate cuts.”
Longer term expectations
Looking beyond 2024, Mr Picton said the bank anticipated the OCR would eventually settle at around 3.5 per cent.
“The RBNZ gives us a bit of an idea about where they think interest rates will settle in the long term because they publish their expectations of what they call the neutral rate, which is the rate at which the RBNZ thinks that interest rates are not adding to inflation or subtracting from inflation,” he said.
“Now, they think that the neutral rate is 2.5 per cent. So they think with a 2.5 per cent OCR, inflation won't be accelerating or decelerating. We think that that is maybe a little bit too optimistic and is based off recent history, but we've seen changes in the structure of the global economy, which maybe suggests that neutral rates are actually higher than what they used to be.”
“So we think it's probably closer to 3.5 per cent rather than 2.5 per cent. And that’s a roundabout way of saying that, in a nutshell, we think that the OCR converges on 3.5 per cent sometime in early 2026.”
Rabobank New Zealand is a part of the global Rabobank Group, the world’s leading specialist in food and agribusiness banking. Rabobank has more than 120 years’ experience providing customized banking and finance solutions to businesses involved in all aspects of food and agribusiness. Rabobank is structured as a cooperative and operates in 38 countries, servicing the needs of about 8.6 million clients worldwide through a network of close to 1000 offices and branches. Rabobank New Zealand is one of the country's leading agricultural lenders and a significant provider of business and corporate banking and financial services to the New Zealand food and agribusiness sector. The bank has 27 offices throughout New Zealand.
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