OCR likely to drop amid easing
The Reserve Bank (RBNZ) is expected to reduce the OCR by 50 basis points to 4.25% at its 27 November meeting, according to Westpac NZ chief economist Kelly Eckhold (pictured above).
The adjustment, part of a shift towards a more neutral monetary policy, reflects RBNZ’s efforts to control inflation while supporting economic stability.
Westpac’s baseline scenario predicts that the OCR will reach approximately 3.5% by the end of 2025.
Westpac’s baseline scenario and key indicators
Westpac’s baseline forecast indicated that RBNZ is likely to reduce the OCR based on current inflation and employment data, with Eckhold stating that “lower headline inflation” provides assurance that inflation will align around 2% in the long term.
Additionally, RBNZ will likely attribute the OCR reduction to a need for front-loading the easing cycle.
Non-tradables inflation, however, remains high, warranting continued restrictive policies.
RBNZ will likely acknowledge heightened geopolitical risks but with little immediate impact on the economic forecast due to New Zealand’s floating exchange rate, which serves as a buffer against external shocks.
Alternative scenarios and probabilities
Alongside its baseline, Westpac considers four alternative scenarios for the upcoming policy decision.
A smaller 25-basis-point cut, with a 15% probability, would indicate a more cautious approach if economic conditions appear stronger than anticipated.
Another possibility, with a 20% chance, is a 50-basis-point cut accompanied by only a minor downward revision of the OCR’s trajectory.
On the dovish side, a 10% probability exists for a 50-basis-point cut with the OCR projected at 3.25% by 2025, aligning more closely with current market rates.
Lastly, a deep cut of 75 basis points is seen as unlikely (5% probability) and would suggest high RBNZ confidence that inflation will remain controlled without causing a strong economic slowdown.
Recent economic indicators influencing decision
Since the last monetary policy statement (MPS) in August, inflationary pressures have eased, especially within tradable goods, Westpac reported.
September’s inflation rate was slightly below RBNZ’s forecast, at 2.2% year-over-year, primarily due to declining energy costs. Non-tradables inflation, although gradually easing, continues to exert pressure on household budgets.
Inflation expectations have adjusted accordingly, with business surveys signaling that inflation is close to the target range.
Economic activity has shown signs of stabilisation. Despite a 0.2% contraction in Q2 GDP, improvements in business and retail activity suggest the downturn may be tapering.
Labour market data revealed that employment is holding steady, with unemployment at 4.8% – better than RBNZ’s projections of 5% – and recent hiring intentions point to a stable employment outlook.
Housing market and commodity prices
The housing sector has been slow to recover, with property sales and prices largely flat. Mortgage applications, however, have risen, and residential consents are holding steady, indicating potential improvement in housing activity, Eckhold said.
Dairy and meat prices, New Zealand’s key exports, have recently improved, supported by demand fundamentals.
The New Zealand dollar remains stable, but potential geopolitical events, including trade dynamics with China and the US, introduce medium-term uncertainties.
Geopolitical context and risks
Global developments such as Middle Eastern conflicts and recent US election outcomes have introduced new variables. Trump’s win signals likely increases in US growth and inflation, indirectly impacting New Zealand’s export sector.
While these changes could benefit New Zealand’s terms of trade, they could also bring short-term inflation relief due to potential changes in energy prices and import dynamics.
For now, the RBNZ will likely take a cautious view of these global risks, with possible implications for a more measured approach to easing in 2025, Eckhold said.
Read the full Westpac report here. To compare with Westpac’s previous forecast, click here.
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