From Relief To Stimulus, The RBNZ Signals More Meaningful Cuts To Come

• After two years of forecasting, praying and rain dancing for a 2.5% cash rate, the RBNZ, finally signalled such a move at their August MPS. And they did so with plenty of conviction. The updated OCR track was massively lowered, now signalling an 80% chance of a move to 2.5%.
• Doves fly in pairs it seems, with more dovish messaging out of Jackson Hole over the weekend. Remarks from US Fed Chair Jay Powell have seemingly opened the door to a rate cut in September.
• Our COTW looks at the steep move in markets following the RBNZ's uber-dovish pivot. Wholesale interest rates plummeted and the Kiwi plunged. Rates will face more downwards pressure from here. While the currency remains at the mercy of big dollar (USD) moves.

Here’s our take on current events

What a week it was. The star of the show: the Reserve Bank’s August MPS. After pausing in July, the RBNZ cut the cash rate a further 25bps to 3% last week. But more importantly, the RBNZ signalled further cuts to come (see our full review here).

Like the May meeting, last week’s decision came down to a vote. But unlike the May meeting, there was a 4-2 vote (first time in history), with 2 committee members favouring a 50bps cut. The statement, the vote, and the forecasts were clearly (appropriately) dovish.

The OCR track was lowered a massive 30 points from a bottom of 2.85% to 2.55% in March 2026. What does that mean? This is important. The RBNZ has gone from signalling a 60% chance of one last 25bps move to 2.75% at the May MPS, to now an 80% chance of a cut to 2.50%.

Going into the August meeting, only 4 of the 30 forecasters surveyed by Reuters were calling for a 2.5% low in the cash rate. It was an out-of-consensus move, and a bold one for the RBNZ to deliver. We commend them. We have been forecasting, praying and rain dancing for a 2.5% since late 2023. We still are, with another two 25bps cuts to be delivered at each of the RBNZ’s remaining meetings this year.

The central bank we saw last week was one almost completely different from the one we saw in May. And while it’s great to see the RBNZ move towards a stimulatory interest rate setting, … it would have been better delivered three months ago. Around a third of the mortgage book has repriced over the last 3 months onto rates that should have been lower. The transmission is slower than it should have been.

Still, the move is good news for Kiwi households and businesses. Interest rates are moving from providing relief to generating stimulus. Just what the economy needs. And the fall in the Kiwi dollar following the RBNZ’s dovish pivot (though somewhat short lived) adds another layer of relief for our exporters currently facing a headwind of a 15% tariff. Check out our COTW for more on the latest moves in financial markets.

The US Federal Reserve was also in the spotlight last week, hosting the annual get together of central bankers at Jackson Hole. Markets had been eagerly awaiting Fed Chair Jay Powell’s opening speech for any hints on their next move. Last year, Powell used his speech to ready markets for rate cuts to begin. And this year, he seems to have readied markets for another cut next month. The Fed has sat on their hands this whole year. But over the weekend, Powell remarked that “the shifting balance of risks may warrant adjusting our policy stance”. With 11 words, the head honcho has swung open the door to a rate cut in September. Markets have gone from pricing about a 70% chance of a September cut to 80%. There was still a sense of caution in Powell’s speech, flagging concerns about high inflation becoming embedded in expectations. Because of that, chances of a 50bps are small. And incoming data will inform whether more rate cuts will follow. Powell’s dovish warning sent US treasuries rallying and the US dollar lower.

Charts of the Week: Massive moves in markets.

The market reaction to the RBNZ’s dovish pivot was a thing of pure beauty. Wholesale interest rates dropped and the Kiwi plunged as the RBNZ delivered a track more than what was priced.

Kiwi rates swooped like a majestic kingfisher into water, with the 2-year swap rate dropping 16bps and splashing below 3% to 2.94% (from 3.1% prior to the announcement). And today, the two-year opens at a new cycle low of 2.90%. This is good news for indebted businesses and homeowning households. An eventual drop in the cash rate to 2.5% should see the 2-year swap rate on a glide-path to 2.8%, taking retail rates lower with it.

Looking at currencies, the Kiwi dollar dropped to a low of 58.21 on the day, breaking through key support levels (around 58.50) against the big dollar. We quickly moved to the lower end of our expected trading range with the Kiwi getting as low as 58.01 by the end of the week. We liked it. It was a good move for our exporters facing a 15% tariff into the US, albeit being somewhat short lived. Dovish messaging from Fed Chair Jay Powell over the weekend saw the USD weaken against the Kiwi. The result, were not too far off from where we were pre-MPS.

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