A 50 basis-point cut to the Official Cash Rate, which would see it drop from 3% to 2.5%, is needed, ASB senior economist Jane Turner says, otherwise there’s a risk of delivering stimulus too late to households and businesses. 

Turner’s comments follow the release of the New Zealand Institute of Economic Research (NZIER) Quarterly Survey of Business Opinion (QSBO) on Tuesday which shows business confidence has fallen in the September quarter to meet reality.

This survey has been running since 1961 and is closely watched by the Reserve Bank of New Zealand (RBNZ) who are set to announce the new Official Cash Rate (OCR) on Wednesday.

The RBNZ is charged with keeping inflation in a 1% to 3% range, and it explicitly targets 2% inflation.

In August, the OCR moved to 3.00% from 3.25% – with two members of the RBNZ’s six-member Monetary Policy Committee voting for a 50-point OCR cut. At that stage an OCR low point of 2.5% by the end of the year was seen as a real possibility by the central bank.

While there’s a universal expectation of a cut to the OCR, the big debate is whether the OCR will be cut by 25bp – bringing it to 2.75%, or 50bp which would see the OCR at 2.5%.

With the September quarter seeing a drop in business confidence as the recovery in demand continues to disappoint, it’s possible these survey results may be weak enough to tip the RBNZ into making a 50 basis-point (bp) cut to the OCR.

‘Wheels are spinning in the mud’

Following the survey release, Turner said more support is needed and the RBNZ “needs to get there faster and deliver a 50 bp cut tomorrow or risk delivering the stimulus too late to matter to households and businesses”.

“The economy may have turned a corner, but we are failing to gain traction to get out of this hole – the wheels are spinning in the mud.” Turner expects a follow-up cut to 2.25% next month.

Westpac senior economist Michael Gordon says: “The NZIER survey suggests that the economy remained sluggish in Q3. It supports our view that the RBNZ will deliver a circuit-breaking 50bp cut in the OCR tomorrow.”

Meanwhile ANZ senior economist Miles Workman says the survey results increase the odds that the Reserve Bank delivers a 50 bp cut on Wednesday.

“All up, we still think strategy favours a dovish 25bp cut tomorrow, but today’s data move it towards the coin flip realm.”

Workman says a 50bp cut would not be difficult to justify.

NZIER deputy chief executive Christina Leung says the easing in business confidence this quarter is the lowest since December last year.

Leung says while NZIER’s core forecast is for a 25bp cut in the October meeting, if the Reserve Bank decided to go for a 50bp cut, “I don’t think anything in here would stop them from doing so”. 

The survey says: “We recognise the increased speculation that the RBNZ will cut the OCR below 2.5% in this cycle, given the persistent weakness in economic activity.”

Continuing to face weak demand

The survey results will not have cheered the RBNZ –  only 15% of firms expect an improvement in general economic conditions over the coming months – a drop from 26% in the June quarter.

Leung says “firms are feeling less confident now given they continue to face weak demand”.

As firms continue to report weak demand, the survey found 14% of firms faced reduced activity in their own business in the September quarter.

The survey says “this waning optimism is leading to increased caution when it comes to hiring and investment” as 23% of firms reduced staff numbers in the September quarter and firms indicated plans to reduce investment in things like buildings, plant and machinery.

While weak demand is the main constraint for firms, the survey says the proportion of firms reporting weak demand as their primary constraint has fallen to 63% in the September quarter. This was 68% in the previous quarter.

The survey says “instead, there has been a modest increase in the proportion of firms reporting capital and finance as the primary constraints”.

“Only 4% of firms reported finding labour was a primary constraint.

“There’s some movement there but overall weak demand remains the dominant concern for firms,” Leung says.

Inflation

Despite this, the survey says “cost and pricing indicators suggest a pick-up in inflation pressures in the September quarter”.

Along with a slight increase in cost pressures, 11% of firms reported they had raised their prices in the September quarter.

“We expect annual CPI inflation to rise just above 3% over the coming quarters. However, continued excess capacity in the New Zealand economy should drive inflation back towards the RBNZ’s inflation target mid-point of 2% over the coming year.”

Manufacturing sector feels the least optimistic

Among the sectors surveyed, the manufacturing sector was the least optimistic as only 3% of manufacturers expected economic conditions to improve.

“Although export demand improved, export demand was still in contraction,” the survey says.

“Profitability in the manufacturing sector deteriorated in the September quarter, despite many manufacturers being able to raise prices to pass on higher costs.

“The weaker global growth outlook, arising from heightened global uncertainties, presents a key headwind for the manufacturing sector, given the influence of global investment on manufacturing demand.”

Despite this drop in confidence, retailers were the most optimistic sector this September quarter even though there was continued weakness in new orders and sales, the survey says.

“The optimism is likely to be supported by the widespread expectations of lower interest rates over the coming year.

“With over 40% of mortgages due for repricing over the coming six months, we expect the reduction in interest rates to date will continue to support a recovery in retail and services demand over the coming year.”