New Zealand Institute of Economic Research (Inc)
Media Release, 3 September 2024
For immediate release
NZIER Quarterly Predictions, September 2024
RBNZ responds to deterioration in economic outlook by commencing easing cycle
There are clear signs of a continued weakening in economic activity as households and businesses hunker down in response to the interest rate increases to date. Households have reduced their discretionary spending in the face of higher mortgage repayments and more uncertain employment prospects. Weaker demand, in turn, has made businesses more cautious about spending and investment. The impact of higher interest rates and public sector cutbacks has become more evident in recent months.
Weaker demand has increasingly become a key concern for businesses, with 61 percent of firms reporting that it is the primary constraint on their business. Alongside this, there has been a sharp turnaround in labour market pressures, with signs of greater slack in the labour market as firms reduce hiring in the weaker demand environment.
This turnaround in the labour market over the past year is driving an easing in capacity pressures and, with it, a continued reduction in inflation. The Reserve Bank of New Zealand is now more confident that inflation will return to within its 1 to 3 percent target band over the coming year, with concerns now shifting to the downside risks to the growth outlook. As a result, the central bank brought forward its easing cycle by cutting the OCR at its August Monetary Policy Statement meeting.
Demand to remain subdued for the coming year
We forecast GDP growth to remain weak over the coming year, which should drive a further reduction in inflation in the New Zealand economy. Households have increasingly fixed mortgage rates for shorter terms in anticipation of imminent interest rate decreases. This shortening in the duration of the mortgage book should facilitate a faster transmission of monetary policy as lower mortgage rates flow through to households when it comes time to reprice their rates.
Nonetheless, the impact of lower interest rates will take time to flow through the economy. Activity and confidence indicators point to demand remaining subdued in the near term. Households remain wary about spending on big-ticket items, while businesses have become more cautious about hiring and investment. Consent issuance points to a weak construction pipeline for the coming year.
We expect a follow-up OCR cut in the October meeting
Given the shift in tone from the RBNZ and our forecast that annual CPI inflation will fall back into the target band by the end of this year, we expect another OCR decrease in the October meeting. Beyond that, there is more uncertainty about the pace of the easing cycle, and any pause in the November meeting will be dependent on the extent to which demand recovers.
Quarterly Predictions is an independent review of New Zealand’s economic outlook and includes comprehensive forecasts of the economy. The full publication is available exclusively to NZIER’s members.
For further information, please contact:
Christina Leung, Deputy Chief Executive (Auckland) & Head of Membership Services
christina.leung@nzier.org.nz, 021 992 985
