Westpac economists have updated their predictions, now expecting the Reserve Bank (RBNZ) to cut the Official Cash Rate (OCR) in October and November.

They also foresee a significant dip in GDP and a rise in unemployment. According to Westpac’s chief economist Kelly Eckhold, recent data suggests that the economy shrank more than expected in the June quarter of 2024, likely by 0.6%. This would be the largest decline in the current economic downturn.

Economic activity, measured by indicators like business and consumer confidence, shows that growth is expected to remain weak throughout the rest of 2024. In the March quarter, GDP grew by just 0.2%, following a period of economic decline. When considering the recent influx of migrants, GDP per capita has contracted more recently than during the Global Financial Crisis.

Westpac economists also predict that unemployment will rise faster than previously thought, reaching 5.6% next year (up from 4.3% in March 2024). The labor market is showing signs of adjusting to the weak economic growth, with a notable decrease in filled jobs since April.

The RBNZ is expected to start cutting the OCR earlier than initially planned, with Westpac now predicting cuts in both October and November. Financial markets are also anticipating these cuts, with a high likelihood of a reduction as early as the next OCR review in mid-August.

The RBNZ aims to keep inflation within a 1% to 3% range, targeting 2%. Inflation, measured by the Consumer Price Index (CPI), was 3.3% in the June quarter, down from 4.0% in March. This softer inflation data supports the expectation that the RBNZ will feel confident enough to start reducing the OCR.

Eckhold emphasizes that while the RBNZ will likely begin to ease restrictions, it will do so cautiously. Domestic inflation remains high, and the RBNZ will monitor data closely before making further decisions on the OCR. Westpac’s long-term forecast sees the OCR falling to 4.5% by May 2025 and reaching 3.75% by early 2026.