This week the Reserve Bank of New Zealand’s Monetary Policy Committee (MPC) lowered the Official Cash Rate (OCR) from 5.50% to 5.25%. 

Many market economists predicted this change. So did Massey University’s AI-based GDP tracker, GDP Live. Borrowers will be pleased. Those needing interest income, less so.  

Of course, the MPC had to weigh up conflicting considerations. The economy is slowing down. Government spending is tighter, more people are losing their jobs, and businesses are not investing as much. Against this, non-tradables inflation is still high. 

How different is this from what the RBNZ was expecting in its May 2024 statement when it projected further increases in the OCR in 2024? 

The June quarter CPI rise of 0.4% was a welcome 0.2 percentage points below the RBNZ’s May 2024 forecast rise of 0.6%. As an annual rate, it was under the 2% CPI target. 

But this result does not entirely explain why the Bank is now forecasting a 0.8% rise for the current (September) quarter when in May it was forecasting a 1.3% rise.  

Another question is why the greater weakness in economic activity is not expected to materially reduce quarterly CPI increases beyond the current quarter. (Unemployment rates are now forecast to remain higher than they were in May forecasts until the June quarter 2026.) 

A further puzzle is that Massey University’s AI tracker, GDP Live, assessed real GDP growth to be positive in the June 2024 quarter, whereas the RBNZ thinks it was markedly negative at 0.5%. Time will tell which forecast is correct. 

The magnitude of the Bank’s change of view is most starkly shown by the difference between in its OCR projections in May and August. In May it projected a rate of 5.7% for the December 2024, now it is projecting 4.9%. 

In short, the MPC’s twin decisions this week to both reduce the OCR and to generate expectations of further reductions this year indicate a substantial change of view.  

New Zealand started raising interest rates earlier than Australia, and by more. Inflation has fallen in both countries, but New Zealand’s decline has been slower. Australia held its official interest rate in its recent review. 

These calls are more art than science. That is why the current system of regular scheduled reviews is important. Review, learn and change accordingly.