OCR preview: High hopes RBNZ will double-down with 50 basis point cut

“We discussed flipping a coin,” says ANZ chief economist Sharon Zollner about the tight odds on whether the Reserve Bank will cut the Official Cash Rate (OCR) by 25 or 50 basis points when it delivers its next Monetary Policy Review on Wednesday.

“It’s going to be a close-run thing, but now that most economists are calling it and the market is pretty much fully pricing it, one has to conclude that on balance the likeliest scenario is that the RBNZ will just take what’s on the table and cut the OCR 50bps to 4.75% next week,” she said.

ASB’s chief economist Nick Tuffley is more emphatic in his expectation of a 50bps cut this week but concedes it is not a done deal.

“It requires the RBNZ to heavily weight the NZIER’s Quarterly Survey of Business Opinion (QSBO) results,” he said. “Evidence of the need to step up the pace of cuts is likely to be stronger by November after inflation and labour market data are out.”

But ASB economists had shifted their call to 50 basis points after getting increasingly concerned “by just how tight monetary conditions are, and how long they would remain restrictive if the RBNZ took a measured approach to easing”.

“Inflation pressures look set to shrink very soon. The QSBO suggested that the deterioration of the labour market has picked up steam and that pricing pressures have weakened considerably. It is a warning signal that inflation risks undershooting the 2% mid-point of the inflation target band,” Tuffley said.

In contrast, the risk of high inflation proving to be sticky was much diminished, he said.

ASB expects the OCR will be down to 4% by February 2025 and will reach a terminal rate of 3.25% from around mid-2025.

BNZ head of research Stephen Toplis also described the decision as a “line-ball call” but opted for 50bps.

“We’d hoped that the ANZ Business Opinion Survey and QSBO would deliver the same message, and in so doing settle the argument. But they haven’t, with the ANZ survey delivering a hawkish message and the QSBO a starkly dovish tilt,” he said.

What the RBNZ decided to do may come down to the weight it put on the starting point as opposed to what the leading indicators said about the outlook a year from now, he said.

“With this in mind, note that the ANZ survey questions businesses about where they see things one year hence while the QSBO asks about the next three months. Therefore, it should be of no surprise that the shorter term view is far more miserable as very few businesses will be expecting a sudden lurch to the positive.

“The containment of inflation was the Reserve Bank’s goal and the vast majority of the data now say that this objective has been achieved,” Toplis said.

“Moreover, there is a growing body of evidence that says annual inflation could soon fall below the 2% midpoint of the Reserve Bank’s target band.”

BNZ is forecasting it to be 2% by March 2025, falling to 1.7% by December 2025.

“The balance of risk is increasingly to the downside,” Toplis said.

Westpac chief economist Kelly Eckhold (also picking 50bps) said the challenge for the RBNZ would now be to maintain firmer control “on the market’s tendency to extrapolate OCR cutting expectations”.

“Moving the OCR closer to neutral will help with that goal. But we also hope the RBNZ will provide a clearer set of parameters on how they would expect to operate policy in 2025,” he said.

Kiwibank economists noted market traders, and economists, had now all positioned for “chunky” 50bps rate cuts.

“The wholesale rates market (measured by overnight index swaps) has 44bps priced into the October decision – roughly 90% chance of a 50bps cut to 4.75%,” they wrote.

“The November decision has another 48bps priced to 4.33%, so that’s most of a 100bps move to 4.25%.”

February was just as interesting with another 45bps priced in already.

“So traders are pricing in ‘odds on’ bets of 50bps cuts. The cash rate is priced to hit 3% by August next year, with a terminal rate around 2.5%, in line with our forecast.”

Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003. To sign up for his weekly newsletter, click on your user profile at nzherald.co.nz and select “My newsletters”. For a step-by-step guide, click here.