New Zealand interest rates will likely remain on hold until February 2025 at which time they will likely drop, according to a new forecast from ANZ New Zealand.
In a recent note, ANZ said that while they had previously expected the RBNZ to hike in February 2025 on the back of sticky inflation, but it now appears conditions have changed enough that rates will likely stay on hold or potentially fall.
“Our call for a hike in February was underpinned by an expectation of a Q3 non-tradable inflation surprise that now looks much less likely to eventuate,” ANZ New Zealand Chief Economist Sharon Zollner said in a preview note.
“We seriously considered pushing the hike out, rather than dropping it, as we still see the inflation-fighting job taking longer than the RBNZ expects, and we still see a solid chance that a 5.5 per cent Offical Cash Rate (OCR) will not prove sufficient.
“However, we no longer see that chance as being over 50 per cent, which means a higher OCR belongs in the risk basket rather than our central forecast.”
The bank said cuts remain a distant prospect, and they have pushed out their estimate of when they will occur by one quarter.
Given that inflation has stabilised but not fallen enough, ANZ also expects rates to remain unchanged at 5.5 per cent at the November 29 meeting.
Ms Zollner said the market was looking for rate cuts and with that in mind, they expect a firm policy tone from the board.
While the odds are now in favour of rates falling, New Zealanders aren’t in the clear just yet.
“We don’t find it difficult to envisage scenarios where the RBNZ hikes again next year,” Ms Zollner said.
“Getting inflation down from 7.3 per cent to, say, 4 per cent is relatively easy, but that last 2 per cent could be very hard going indeed, and we do see the task taking longer than the RBNZ expects.
“The ducks are currently lined up but have a long way to march in formation yet.”
ANZ said inflation was still roughly twice where it should be.
“Non-tradable inflation will fall – is falling – but not off a cliff, because the economy isn’t going off a cliff,” she said.
“It’s slowing, certainly, and there’s real pain out there in pockets, but that’s what a ‘soft’ landing feels like – it’s still a descent, after all, from what was an unsustainable flight path.
“There are of course developments that could see cuts much sooner than we are forecasting; there are always risks on both sides.
“But if the OCR does move in the next six months, in our view it’s still likelier to be up than down.”
Ms Zollner said to cut rates, inflation needs to be a lot closer to target, and the RBNZ needs to be confident it will get there and stay there.
“Given how the market will rush to price more cuts, the RBNZ would need to be comfortable with a sharply lower yield curve overall, not just a lower cash rate,” she said.
“And we’re a very long way from that point as things stand.”