For the first time since the arrival of Covid-19, interest rate cuts are a real possibility, writes Stewart Sowman-Lund in this extract from The Bulletin.

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Buckle in

Happy official cash rate day to all who celebrate. And maybe, just maybe, there will be some celebration today. Since 2020, there has been little to get excited about when it comes to the release of the OCR. And since May last year, there’s been very little to even talk about. Things have been in a holding pattern as the cost of living crisis raged on and inflation stayed high. In recent weeks, there have been murmurings that things are improving. At 2pm today, we’ll get the most black and white update on whether things are indeed different, as explained in detail by an excitable David Hargreaves in this piece for Interest. As he writes, while there’s every chance the cash rate could be kept steady once again, there’s also every chance it won’t. Things are in flux for the first time in months and that has economists (and some newsletter editors) excited. So what could we see today, and why does it matter?

Predictions, please

Forecasts around the OCR are, said BusinessDesk’s Dileepa Fonseka on Nine to Noon yesterday, a bit of a fool’s game. Nevertheless, let’s look at what has been predicted. Banks are mixed on whether we’ll actually see a cut today, reported 1News’ Anna Murray. Of the big banks, ASB and BNZ are tentatively picking a drop, while ANZ – often the most outspoken in its predictions – and Westpac have picked things will stay steady. Kiwibank’s economists have hedged their bets, predicting the Reserve Bank will hold the line but arguing that a cut would be the right move. One bank, TSB, has jumped the gun and preemptively cut its advertised home loan rates. Whatever happens today, the Reserve Bank will also lay out its plans for future OCR decisions.

There’s also mixed opinion from the shadow board of the NZ Institute of Economic Research, with over half arguing for a cut and the rest urging no change, while RNZ’s Nona Pelletier, from whom I have learnt pretty much everything I know about the economy thanks to her Checkpoint slots, reported that some high profile business leaders are also anticipating a cut today (or at least this side of Christmas).

Why some are expecting fireworks

The uncertainty described above is part of why today’s 2pm announcement will be even more closely watched than usual. But some of that uncertainty – and why it may ultimately be pointless to try and make a prediction – lies with the Reserve Bank itself. In May, explained Interest’s David Hargreaves, the central bank signalled a rate hike could be on the cards this year with cuts not expected until 2025, before quickly (and dovishly) pivoting to tease imminent cuts just a couple of months later. It all points to a close call today, though some, like Squirrel’s David Cunningham, have argued that kind of forecast flip flopping is unhelpful.

A lot has changed over the course of 2024, with the results of a business survey last month being interpreted by some that inflation – the main trigger for high interest rates – had been beaten. In that interview with Nine to Noon, Dileepa Fonseka noted recent comments from Treasury’s chief economist that interest rates are not a problem to be solved, they’re solving a problem: high inflation. The most recent data on that, as reported here RNZ’s Gyles Beckford, was that annual inflation had dropped to its lowest rate in three years. At 3.3%, it’s just shy of where the Reserve Bank is aiming for. Then there’s growing (though not quite surging) unemployment, a sign that the economy is at risk of bursting under restrictive conditions, and an increasing number of people leaving the country for good (as we talked about earlier in the year).

It’s been a long time between drinks

As mentioned, the last time the official cash rate changed was in May last year, as the graph below shows. That followed a series of hikes dating back to the depths of the Covid-19 pandemic. If you jump back before the unprecedented Covid dip, it’s been about five years since the official cash rate was sitting anywhere in the healthy zone. Not everyone will be celebrating, reported RNZ’s Susan Edmonds. If you’ve got money in a term deposit that you’ve been watching go up and up, expect your returns to fall as interest rates peel back.

There’s a political angle to consider here as well. For the government, a cut today would be most welcome. Off the back of its key election promise of tax cuts coming into force just a fortnight ago, any signs that the economy is on the up will be claimed as a victory for the coalition. The Post’s Luke Malpass writes that the tax cut scheme will have been the “subject of close scrutiny” by the Reserve Bank. The finance minister Nicola Willis has preemptively painted a fairly grim outlook for the economy, which could make any signs of improvement feel just that little bit better. Get out your popcorn, we’ll have all our answers at 2pm.