75bp OCR cut needed to help economy ‘stuck in rut’, fund manager says

“A common comment from dissenters about cuts of this magnitude is that such large cuts are usually reserved for emergencies.

“It’s not hard to argue that we’re in these circumstances right now,” Smith said.

He said the RBNZ should no longer be concerned with saving jobs, but should avoid unnecessary instability in output, employment, interest rates and the exchange rate.

Inflation has fallen back into the RBNZ’s target range of 1 to 3% and could be 2% below its desired midpoint and towards the bottom of the target range.

“So it’s not hard to argue that we should be at or below the RBNZ’s ‘neutral’ rate – neither growth-boosting nor growth-restraining – of 3.8%… right now.

“The arguments for a 75 basis point cut in the official exchange rate do seem legitimate.”

Terrible Economy – Flashing Red Lights

“Our economic data is terrible and the RBNZ should probably hit the panic button.

“The economy is in recession and unemployment is rising,” Smith said.

He noted the weakness in the monthly performance of the manufacturing and services sectors.

“Key parts of the Kiwi economy appear to be stuck in a rut, which consequently increases the need for emergency measures.”

Smith doubled down on domestic risks, warning of “flashing red lights” from abroad.

“The growth outlook for China, our largest customer, remains uncertain… posing downside risks to New Zealand’s real export growth and export and import prices,” he said.

Smith’s call for a significant reduction in OCR has not been completely ruled out by economists and financial sector commentators, but it is certainly a minority view.

BNZ head of research Stephen Toplis, an early advocate of rate cuts earlier in the year, believed drastic measures were not needed and would not be used.

“Given that the RBNZ has already cut rates by 25 basis points more than expected… and given that a further 50 basis point cut is likely to be implemented later this month, we see no reason to argue for anything more,” Toplis said.

ASB senior economist Mark Smith agreed. He said the barriers to significant rate cuts are high and depend on the economics and the balance of risks.

“We expect the RBNZ to return to a more measured pace of OCR easing in 2025, with the OCR endpoint of 3.25% reached by the end of 2025.”

But Greg Smith said there was another imperative – the gap between the last meeting in 2024 and the first meeting in February next year.

“That’s almost three months in which quite a lot can happen to our growth profile, and not necessarily in a good way.”

Anecdotal evidence they received from businesses, large and small, pointed to firms struggling, with some on the brink of bankruptcy.

“A larger rate cut in the run-up to Christmas could be critical,” Smith said.

He wondered whether the much-needed real giant cuts would be avoided at all?

“To maintain the recognition that New Zealand’s economy is lagging behind many others and that rates have been raised too high, too quickly and held there for too long?

“Time will show”.