Reserve Bank hoses rate cut expectations


Earlier this week I reported on New Zealand’s CPI inflation which, like in Australia, has fallen more quickly than the Reserve Bank forecast.

The below chart from Justin Fabo at Antipodean Macro summarises the situation in New Zealand:

NZ CPI Inflation

The next chart from Fabo shows that inflation is falling across a wide range of categories:

NZ Breadth of inflation

Meanwhile, New Zealand’s economy is mired in recession and tracking below the Reserve Bank’s projections:


Based on this data, it looked certain that the Reserve Bank would leave interest rates on hold for a period before commencing an easing cycle later this year.

However, Reserve Bank chief economist, Paul Conway, said in a speech on Tuesday that the run of soft inflation and economic data does not imply that interest rates will be cut or there is less inflation in the economy.

“Yes, lower GDP indicates weaker demand, but also that the productive capacity of the economy was lower than previously assumed”, Conway said.


“That is, the recent GDP revisions do not necessarily mean that capacity pressures in the economy are much lower than previously assumed”. 

“To sum up, monetary policy is working, with the economy slowing and inflation falling. But we still have a way to go to get inflation back to the target midpoint [of 2%]”, he said.

Economists saw Conway’s statement as a refutation of recent market pricing and commentary that indicated interest rates would be cut sooner rather than later.

Senior economist at Westpac, Satish Ranchhod, described the tone as “hawkish” and pushed back on expectations of policy easing in the near future.


“Overall, we view today’s comments as being consistent with our forecast that any easing in policy is still some way off. Market pricing for easing in the first half of this year still seems premature”, Ranchhod wrote in a note.

The chief economist at ANZ, Sharon Zollner, said in a note, “The speech did … clarify that the weaker GDP data is not a slam dunk for an imminent dovish ‘pivot’”, she wrote in a note.

“We are not anticipating a hike next month, but unlike current market pricing, would not rule one out”.


Infometrics’ lead economist, Brad Olsen, stated on Twitter (X) that there was no indication in the speech that the Reserve Bank was planning to change its stance.

“In fact, he emphasized a number of factors that seem to support a strong stance on interest rates … Nothing forceful either way, but I’d say [it was] a gentle pushback on expectations of cuts soon”, Olsen said.

With inflation easing globally amid softening economies (see below chart), I’m still firmly in the camp that central banks globally will be cutting rates before years’ end.

Global inflation
About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.