Could the Reserve Bank slash the OCR by 75 basis points?

Wednesday, 9 October 2024

Reserve Bank governor Adrian Orr is widely expected to announce a 50-basis point cut to the official cash rate on Wednesday.

Economists expect the Reserve Bank to cut the official cash rate by 50 basis points on Wednesday.

But one fund manager says the central bank should go further and cut the rate by 75bp.

The last time the OCR was cut by more than 50bp was at the start of the Covid-19 pandemic.

Economists have reached a consensus on the Reserve Bank’s most likely course of action at Wednesday’s official cash rate (OCR) announcement, tipping a 50-basis point cut.

With one week until the next OCR update, economists are predicting a bigger rates cut than August. ANZ’s latest business survey shows business confidence rebounding as interest rates drop, offering some relief.

But one fund manager says the central bank needs to go further and cut the rate by 1.5% cut by Christmas.

At its August meeting, the RBNZ trimmed the OCR by 25bp to 5.25%, the first cut in four years, and economists have widely predicted the rate will fall by 50bp to 4.75% on Wednesday.

Devon Funds head of retail, Greg Smith, told RNZ the central bank should make a 75bp cut on Wednesday, and another next month.

Although he said the RBNZ should make the bigger cuts for the sake of the economy, he didn’t think it would.

Smith said he wondered why everyone had been debating whether the cut would be 25 or 50bp.

“Is it just because everyone else is cutting by that much? Shouldn't we be thinking about what we need to do?“

Westpac chief economist Kelly Eckhold says stepping up to a 50-basis point cut will be a “big adjustment” for the Reserve Bank. (File photo)

Westpac chief economist Kelly Eckhold said the RBNZ was unlikely to make a 75bp cut.

In August, it had projected two 25bp cuts, so stepping up to 50bp would be a big adjustment.

“The judgement is really between taking a gradual approach and moving 25bp now with the option to step up the pace at the November Monetary Policy Statement versus moving more quickly towards more neutral interest rate levels and doing two 50bp moves.”

A 75bp cut would normally be reserved for more demanding circumstances, which there were no signs of now, Eckhold said.

ASB chief economist Nick Tuffley says the RBNZ needs to get the OCR back to a low level “quite quickly”, but is more likely to do that through a series of 50bp cuts. (File photo)

The last times the OCR had been cut by more than 50bp were at the start of the Covid-19 pandemic in March 2020, and in December 2008 and January 2009, during the global financial crisis.

“Moving the OCR down by 100bp before Christmas would add up to a chunky 125bp of cuts for 2024.

“This would be in line with what is occurring among peer economies considering the good progress made on reducing inflation and the weak economy and labour market. More than this might signal panic which wouldn’t be warranted.”

ASB chief economist Nick Tuffley said the chances of a 75bp were “pretty modest”, but it couldn’t be completely ruled out.

However, like Eckhold, he said that the move would be a big step for the RBNZ, given its recent statements that steady 25bp cuts would be sufficient.

“I agree that the RBNZ needs to get the OCR back to a low level quite quickly, though is more likely to do that through a series of 50bp cuts.

“At this point the RBNZ would need to be putting huge weight on one survey, ahead of some more tangible signs that the economy is weakening considerably more than it has already banked on.”

Next week’s Consumers Price Index data and and the household labour force survey in early November would give the RBNZ more evidence to work with ahead of November’s Monetary Policy Statement, he said.