MNI INTERVIEW: RBNZ To Cut 25bp, Eye 50bp Move - Reddell

The Reserve Bank of New Zealand’s Monetary Policy Committee could discuss a 50-basis-point cut to the 3.25% Official Cash Rate at next week’s meeting as unemployment rises and the economy continues to stall, but will likely opt for a quarter-point move, a former bank official told MNI.

Economic data since the July meeting point to a persistent lack of growth, said Michael Reddell, independent economic commentator and former RBNZ special adviser. “I think things are probably getting worse rather than better. At the moment, things are also much worse in Auckland and Wellington than they are in the provinces,” he said.

Weak productivity and a widening output gap are putting downward pressure on core inflation, Reddell noted. “That gives me confidence that core inflation really can only head down from here,” he said.

Reddell, also a current Bank of Papua New Guinea board member, maintained his estimate of a circa 2.5% neutral rate but said the MPC would let incoming data guide further cuts. (See MNI INTERVIEW: RBNZ OCR Below 1% Possible On Trade Woes) “Best guess, maybe 50bp of cuts for the remainder of the year, but a 50-50 chance it’s 75bp and if so, it’s back-to-back.”

While headline inflation offered a slightly hawkish signal, wage growth has slowed to pre-pandemic norms, Reddell said. “If you were at all serious about wanting to give a bit of a kick to the economy, having beaten inflation, then 50bp should be considered. If neutral really is 2.5%, then who knows – maybe we end up getting to 2% [OCR]. But that would be a bold call at the moment.”

Markets have priced in an 89% chance of a 25bp cut at next week's meeting and point to a 2.75% rate by Q2. 

LEADERSHIP RISKS
Reddell warned that a leadership transition at the RBNZ could interrupt easing plans. A new governor, possibly appointed by October, may want to wait for fresh forecasts within a Monetary Policy Statement before further cuts, he said. The government must also replace departing board member Bill Buckle within six weeks, adding to uncertainty. 

“Nobody has the slightest idea who they might appoint,” Reddell said. “Whether it makes much difference, who knows. But it’s going to depend a lot on the character and quality of the governor. You could find a governor who is more open and transparent, but that’s probably wishful thinking on my part.” 

Christian Hawkesby has acted as governor following Adrian Orr's sudden departure in March. 

The RBNZ is also in the process of reducing staff by up to 20% through hiring freezes and redundancies, though the cuts are focused on support roles and should not affect critical functions, Reddell added.