Nick Tuffley: ASB Chief Economist on the Reserve Bank cutting the OCR by 25 basis points

A lack of consensus at the Reserve Bank on yesterday’s cut to the OCR reflects the global economic uncertainty. 

The Monetary Policy Committee has dropped the cash rate 25-basis points to 3.25%, and now expects to reach a 2.9% low-point in December. 

However, further cuts are uncertain, with the bank adopting a watch and wait approach. 

ASB Chief Economist Nick Tuffley told Ryan Bridge they still believe we’ll get another cut next month, but it’s uncertain how far the Bank will go. 

He says it’s possible we will pause at some point. 

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Episode Transcript

Speaker 1 (00:00):
We've got another OCI cut down twenty five points to
three point twenty five. Uncertainty again reigns supreme. They reckon
we'll get another cut at their next meeting, but there's
a bunch of caveats to that. Inflation will hit two
point seven percent nearly out of range, then come down
to two percent next year. Nick Tuffley, chief Economist, today
is to be back with me this morning, Nick, Good
morning morning. Does the fact that they had to vote

(00:21):
on this one make it more or less hopeful that
they will do a cut next time?

Speaker 2 (00:27):
Look, it is really a reflection of just how much
uncertainty there is out there, and the member of the
committee that voted to keep things on hold just really
wanted more time to see how some of the the
inflation risks pan out. And of course the big one
is what Donald Trump is doing with the tariffs and
just how that will impact inflation in New Zealand. I

(00:48):
think we still get another cut next month. We still
think we'll get two more in fact, but there's still
that uncertainty about just how far the Reserve Bank will go,
and also when it's almost possible pause at some point.

Speaker 1 (01:02):
The Trump uncertainty, think the only certain thing about him
is that he is uncertain. Does that not take some
of the unpredictability of it out of the equation?

Speaker 2 (01:12):
Well, the challenges is that when you have an uncertain environment,
you get people who don't make decisions, and that also
flows through and potentially weakens the economy. For the Reserve Bank,
where they seem to have been debating global growth will slow.
What will that do to inflation? Is it going to
be a bit like a supply shop or a cost
shop where it just gets more expensive to make stuff

(01:33):
around the world, or is the dominating fact going to
be people stop buying things, you get weaker demand, you
get slow exports from New Zealand, and less inflation pressure.
So they've assumed that's what's going to happen. But they
are in two minds and that's where the internal debate
seem to have been for this meeting.

Speaker 1 (01:53):
And then you look at consumer confidence bouncing back in
the US, you look at some of that Chinese industrial
profit number, you look at a whole bunch of stuff.
I mean, it's not it's not actually doom and gloom,
is it.

Speaker 2 (02:06):
Look it's not overall? I think with the brink being
sort of pulled back from particularly around China and the US.
You are getting some of the lurching from a sort
of almost a freeze on some trade and manufacturing to
its starting to turn around. But look, even that is
doing some damage in the short term. And the reality

(02:26):
is is that when you look at the US consumers,
there will have slightly less money to go around. In China,
there's going to be slightly less manufacturing activity. There will
be ripple effects coming through. But no, not the end
of the world, but it is in our view, likely
to dampen inflation when you're looking a year or two out.

Speaker 1 (02:43):
They spoke about, you know, the three percent neutral rate,
and there was people asking at the press conference, you know,
do you go lower so that you start revving things up,
and they said, basically, we don't like that word anymore.
It's a little bit obsolete because we're so close to neutral.
We're going to start using this quote feel our way.
What's that about?

Speaker 2 (03:02):
Well, I think that's reality is like neutral some concept
where you can never really see it, and they see
it somewhere between two and a half and three and
a half. So they're kind of in that territory at
the moment. It's kind of like trying to engineer a
landing in the fog. You kind of have to sort
of almost sort of wait until you feel a bit
of rumbling from the ground coming through. Where we are
at the moment, you can see there's a bit of

(03:23):
a lag in the impact of interest rates coming through.
That's that's pretty clear, and that's always there. But it
does look like with the economy just taking a little
bit of time, but that's a domestic spending to get
going that we still need interest rates to go with.

Speaker 1 (03:37):
Them go yet, yeah, but not too low because they
don't want to overcook things the other way, right, And
there's a time leg as you say.

Speaker 2 (03:44):
Yep, there's always the art and you're doing it where
it takes two years for what you do to have
its full effect as well, so it's not easy.

Speaker 1 (03:52):
Appreciate your time, Nick Nick Tuughly asp Chief Economists. For
more from earlier edition with Ryan Bridge, listen live to
News Talk said Be from five am weekdays, or follow
the podcast on iHeartRadio.