‘Heads should roll’ if RBNZ changes official cash rate
‘‘HEADS should roll’’ at the Reserve Bank if it decides to move the official cash rate this month, when economic data has broadly moved in line with its forecasts, one economist says. Calls have been heating up for a cut this month as the economy looks increasingly weak.
Data yesterday showed the unemployment rate hit 4.6% in the June quarter, just under economist forecasts of 4.7% but in line with the Reserve Bank’s most recent prediction. Infometrics chief executive Brad Olsen said when the Reserve Bank forecast that level of unemployment for June, it was alongside interest rate forecasts that did not include a drop in the official cash rate (OCR) until August next year. ‘‘Unemployment has done roughly what they thought, inflation is slightly better than they thought, nontradeable inflation slightly worse — and [people think] they’re going to move interest rates a whole year early?
‘‘Heads should roll at the Reserve Bank if that’s the case, because they obviously don’t understand what’s happening in the economy.
‘‘On previous forecasts, they were saying these conditions would merit interest rates holding a lot longer. We’re quite literally at a complete loss as to what might happen next week.’’ Both BNZ and Kiwibank have called for an August cut on the basis of weakness in the economy.
‘‘Is there an argument for cutting next week? Absolutely,’’ Mr Olsen said.
‘‘But this is also the state of the economy that the Reserve Bank said didn’t warrant relief until this time next year . . . Our official forecast is for a February cut.
‘‘We don’t think that’s viable but we don’t know yet how the Reserve Bank responds to all this.’’
He said it was possible the Reserve Bank could use the August update to signal rate cuts were coming earlier, and then potentially move 50 basis points in November.
‘‘We could see something in August but — the turnaround job that would be on where they currently are, it would suggest a monumental shift — it’s almost impossible to comprehend.’’
BNZ economists said the economy was ‘‘buckling under the pressure’’ of the tight monetary conditions, as well as falling migration, government cutbacks, rising unemployment and reduced investment activity.
‘‘Business profitability is coming under extreme pressure as rising input costs can no longer be passed on through heightened selling prices.
‘‘This is a general theme but, in particular, we are getting increasingly concerned about what the rising cost of energy is doing to increasingly marginalised energy intensive industries.
‘‘Additionally, we are seeing pressure on sectors that have, until recently, been doing relatively OK such as, for example, the accommodation sector with Hotel Data NZ reporting that revenue per available room fell an annual 36.2% in Wellington in July and 20.9% for Auckland.’’
Falling commodity prices and geopolitical tensions were also adding pressure, they said.
‘‘We strongly believe the Reserve Bank should be easing monetary policy as soon as possible. Indeed, we are on record as having said that it should already have done so. ‘‘Given the lags between rate moves and their impact on the economy, and the current parlous state of New Zealand, we strongly advocate that the bank starts a progressive easing cycle from the August meeting.’’ Kiwibank economists also said a cut in August was the right thing to do, followed by a cut at every meeting until the cash rate hit 2.5%. — RNZ