(Bloomberg) -- New Zealand’s central bank will have to weigh signs of slowing inflation against a rebound in business confidence when it decides how much to cut interest rates by next week.
While firms are struggling to raise prices due to weak demand, they are also more upbeat about the economic outlook now that borrowing costs are falling, the New Zealand Institute of Economic Research said Tuesday in Wellington.
With the economy likely in recession, unemployment rising and price pressures rapidly abating, there’s little doubt among economists and investors that the Reserve Bank will follow August’s rate cut with another on Oct. 9. But they’re unsure whether it will opt to lower the Official Cash Rate by 25 or 50 basis points.
“You could make the case for either move,” said NZIER Principal Economist Christina Leung. “We expect a 25 basis-point cut but to the extent that you see that continued sharp decline in pricing we can see the case for either.”
A net 3% of firms increased prices in the third quarter, the lowest since the end of 2020, NZIER’s Quarterly Survey of Business Opinion showed. Just 7% expect to hike prices in the final three months of the year.
At the same time, a gauge of business sentiment improved to a three-year high with a net 1% of firms expecting the economy to deteriorate in the next six months, down from 44% in the previous quarter. That follows a survey from ANZ Bank yesterday that showed business confidence at a fresh 10-year high.
‘Bold Call’
But Stephen Toplis, head of research at Bank of New Zealand in Wellington, said the “disinflationary information” from the NZIER survey will dominate the RBNZ’s deliberations and push it to cut the OCR to 4.75% from 5.25% next week.
“While we are now touting a 50-point move we accept that this is a bold call and that a conservative central bank could easily balk at an acceleration,” he said.
Investors see a roughly 60% chance of a 50 basis-point rate cut on Oct. 9, swaps data show.
Inflation slowed to 3.3% in the second quarter and the RBNZ expects it to drop to 2.3% in the third, which would put it back within the central bank’s 1-3% target band.
Pricing pressure has been squeezed out of the economy as demand stalls. Gross domestic product fell 0.2% in the second quarter and most economists, including the RBNZ, project that it contracted again in the three months through September.
Soft demand is the primary constraint on business with 64% of firms saying sales were their biggest concern, according to the NZIER survey. By comparison just 5% were worried about getting the workers they need, adding to signs of a loosening labor market and rising unemployment, Leung said.
A net 31% of firms said their own trading weakened during the quarter and more than a third reduced their workforce, while hiring and investment intentions remain weak.
“Rebounding confidence and expected activity shouldn’t derail disinflation progress given the degree of excess capacity out there, particularly in the labor market,” said Miles Workman, senior economist at ANZ Bank in Wellington. “We see these data as consistent with a 25 basis-point cut next week.”
©2024 Bloomberg L.P.
