ANZ Research suggests a 50bp cut is the most probable outcome
The Reserve Bank of New Zealand (RBNZ) is on the verge of making a significant move to lower the Official Cash Rate (OCR) by 50 basis points to 4.75%, with most economists and market players expecting the adjustment during the upcoming monetary policy review.
Since the RBNZ’s August Monetary Policy Statement (MPS), economic data has indicated continued weakness, but second-quarter GDP came in slightly stronger than forecasted.
Monthly activity indicators are showing signs of recovery, while a cooling labor market suggests that inflationary pressures are easing. According to ANZ Research, these developments have bolstered the central bank’s confidence in its current policy path.
As downside growth risks have moderated, the RBNZ is likely to prioritize getting the OCR closer to neutral, which supports the case for a larger rate cut. ANZ Research notes that, if the central bank proceeds with the anticipated 50 basis points cut, a similar reduction in November is likely. However, the final decision will remain data-dependent.
“The RBNZ has clearly pivoted to focus on downside growth risks,” ANZ Research noted, adding that a larger cut may be viewed as "a low-risk strategy" to stimulate the economy.
While some economists argue for a smaller 25 basis points cut, citing the lack of major negative surprises in recent data, a more substantial cut would help move the OCR to a more neutral setting quickly.
The central bank hinted in August that a larger cut was on the table, and with inflation expected to remain under control, it may now feel unbound by previous caution.
Inflation data remains a critical factor, with third-quarter CPI projected to stay well within the 1-3% target range, with a 2.3% year-on-year increase expected. However, non-tradable inflation is forecasted to rise by 5.1%, a figure that ANZ Research cautions remains “a forecast, not a fact.”
Despite this, the central bank appears confident that inflation is on track to continue declining.
Interest rate movements abroad, particularly influenced by the U.S. Federal Reserve, have also impacted the local economic outlook, contributing to a decline in swap yields.
ANZ Research pointed to the “significant mortgage rate falls” as a factor that could pose some upside risk to inflation.
Ultimately, the RBNZ’s decision will hinge on its assessment of whether inflationary pressures have eased enough to justify a larger cut. As ANZ Research noted,“The market has made its mind up firmly in favour of 50bp; we view it as a much closer-run thing than that.”
The central bank’s upcoming decision will provide insight into its confidence that current economic measures are sufficient. Further rate cuts may follow in November if conditions warrant continued easing.
