15 May 2024

Don't delay interest rate relief too long - Westpac tells Reserve Bank

6:59 am on 15 May 2024
Groceries, money, road cones and a bar graph ascending

Household purses are likely to feel the pressures of inflation and attempts to fight it for the rest of 2024, Westpac's chief economist says. Photo: RNZ

Measures to pull in inflation don't need to be pursued to the bitter end before cutting interest rates to give households some relief, Westpac has said of Reserve Banks controls.

Westpac's latest economic outlook points to weak growth for the rest of the year, rising unemployment pushing continued pressure on households, and little chance of lower interest rates.

The bank's chief economist Kelly Eckhold said stubborn inflation and the RBNZ's determination to control it would be the key issues confronting households in the rest of 2024, which would be an "uncomfortable" time.

Read more: Inflation picked to fall back into Reserve Bank target during 2024 - survey

"Monetary policy will force New Zealand to do the hard yards in 2024, but provide modest easing in 2025," Eckhold said.

"Further falls in headline inflation are expected and inflation should be just below 3 percent in late 2024. However lower non-tradable inflation is required to sustainably drive inflation to 2 percent."

"We think the RBNZ will be content with ‛almost 2 percent' inflation in 2025," Eckhold said.

He said the jobs market would be the crunch area for households, with those in employment able to get through, although he expected the greater number of people chasing fewer jobs would push unemployment to 5.4 percent next year, while also applying brakes to wages.

"Household debt is likely to remain manageable, even with the labour market weakening."

Balance the books

Eckhold said how the government went about balancing its books, cutting spending, and implementing tax cuts would be important factors.

"The fiscal outlook is challenging, with a prolonged tight fiscal stance required to return the books to surplus at a time when rapid population growth is lifting the demand for services."

Westpac forecast an extra $25 billion of borrowing for the next four years, and doubted the government would reach a budget surplus in 2027/28 as forecast in the half year economic and fiscal update.

"A lower nominal tax base mean lower tax revenues and strong population growth will make it hard for the government to constrain spending beyond the next couple of years."

"It's not going to be an easy path back to fiscal balance and it might [be] a good few years before we can reasonably expect that."

The government is scheduled to deliver the national Budget 2024 in two weeks, on 30 May.

No rate cuts yet

Eckhold said the RBNZ was expected to start cutting the cash rate early next year, with the cash rate falling to 4.5 percent by the end of next year, and the new neutral level - where the cash rate neither stimulates nor restricts the economy - would likely be about 3.75 percent.

He said that would also limit the amount of easing in retail interest rates.

"That will mean mortgage rates that are closer to 5.5 or 6 percent for some maturities."

Get the RNZ app

for ad-free news and current affairs