Brad Olsen: Infometrics Principal Economist warns the RBNZ will need to slash the OCR quicker to keep up with inflation

There's pressure growing for the Reserve Bank to move more aggressively on the Official Cash Rate.

New Zealand's inflation rate is officially back on target, at 2.2 percent.

Infometrics Principal Economist Brad Olsen says that although the Reserve Bank has recently cut the OCR - it's still higher than it should be.

He says the Bank probably needs to slash the rate faster than it originally intended.

"It does open that strong possibility of a 75 basis point cut in November - because they'll be taking a 12-week break over summer."

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Episode Transcript

Speaker 1 (00:00):
Inflation is officially back where it belongs. CPI for Q
three came in at two point two percent today. That
is well within the one to three percent target range.
Now this puts pressure obviously on the Reserve Bank to
continue dropping the official cash rates significantly before the end
of the year. Brad olsonism for metrics principle economists. Hey, Brad,
good evening. Now we can't say it's totally beaten, because

(00:20):
obviously it could rise again. How do you rate the
chance that inflation goes back up.

Speaker 2 (00:25):
Look at the moment, it's an exciting day to see
inflation back in the target band, and I'll take that
for the moment. Yes, there are always risks abound, particularly
you know, you look at the likes of fuel prices
which have come down in the last quarter or so.
That's been encouraging, but at the same time always a
risk that you know, foreign activities come through and you
have conflict that means that fuel prices rise, so that

(00:46):
there's a risk. You're totally right, and certainly this inflation
figure as well that was published today has been affected
by a number of government policy changes, the likes of
the Family Boost scheme for early childhood, the return of
prescription charges, the end of the year Aukland regional fuel tech.
So there's a lot of moving parts, but long story short,
those core measures of inflation are in a better place.

(01:06):
We've got headline inflation back in the target band and
actually pretty close to the midpoint. Inflation was better than
the bank is a good result. It does, I think,
also reinforce why the Reserve Bank was right to go
with that fifty basis point cut last week, because it
is obviously quite clear that phase and basing there's no

(01:27):
need much restriction on them.

Speaker 1 (01:29):
Listen, Brad, your phone is just cracking up. So if
you've moved into a spot that's a bit dodgy, moved
back to the other spot that you were at at
the start, because that was pretty good. Do you think
now that inflation is sitting at two point two percent,
that the OCR at four point seventy five percent is
too high?

Speaker 2 (01:44):
Yes, quite clearly, that the official cash rate is too high,
and I think that's why there is a strong possibility
now that the Reserve Bank will have to not only
continue to cut the official cash rate more aggressively than
it might have originally intended to, but it does open
that strong possibility of a seventy five basis point cut
in November when they meet in a couple of weeks
at time, because they'll be looking at taking a three

(02:07):
month break a twelve week break over summer. Obviously, inflation
is in a better position, the economy doesn't need to
be restricted as much, and so they might well need
to accelerate how quickly they try and normalize things.

Speaker 1 (02:18):
So, if four point seventy five percent is too high,
where should it be?

Speaker 2 (02:22):
You've got to feel like at the moment, probably somewhere
around three and a half is sort of the shoe
plate place to get to.

Speaker 1 (02:28):
Then we're talking about one hundred and twenty five basis
point cut and they've only got one more cut left
this year.

Speaker 2 (02:34):
Yes, but and this is the challenge, is that around
three and a half is probably where you want to
get to. Now. The risk is if you did something
crazy like one hundred or one hundred and twenty five,
I think that would signal to people that you've sort
of lost all control. And so I think it's something
like seventy five. The Reserve Bank can say, look, we're
not saying we're wrong, but we're saying that we're wrong
enough that we probably need to accelerate things without putting
it down and writing anything more sounds like absolute emergency

(02:57):
alarm bells. Gfc's just happen again, And we're not quite
an position, because otherwise you would start to go, well,
the Reserve Bank might be doing the right thing, but
do I trust them that they've actually got any idea
what they're doing If they had to go so big,
fifty is sort of saying that they need to accelerate it.
Seventy five would be a big move, but they could
probably justify it in November, but they couldn't keep doing
it time and time again. So there's a little bit

(03:18):
of a balance for them in terms of do they
go big once and try and sort of really try
to get things down, but also they don't want to
get their inflation fighting credibility back and then also lose
it at the same time by everyone saying we've just
always moved too late on this stuff.

Speaker 1 (03:32):
Brad, Have they realized that they got it wrong?

Speaker 2 (03:35):
They'll never say it, but I mean put it this way.
They had twenty five basis point cut in August. They
followed that up with a fifty that wasn't really what
their own forecasts were implying, of course, go back to May,
and they were expecting interest rates might have to remain
high or go up. So I think that sort of
pivot that they've had, despite the fact that there aren't
as many pictures of all of this from the Reserve Bank. Yes,

(03:57):
they have got it wrong. They've moved too slow, move
too slow on raising restrates. They've now moved too slow
to bring them down, and that's quite clearly causing economic pain.

Speaker 1 (04:06):
Good stuff, Brad, thank you very much, just as I thought.
That's Brad Olsen, Principal economist, add Informetrics. For more from
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Speaker 2 (04:15):
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