The RBNZ Are Still Playing Catch Up. Hopefully 2.25% Is The Bottom. But Maybe Not. Maybe We Need 50bps

• The RBNZ’s final monetary policy decision for the year is fast approaching. A 25bps cut is widely expected. The focus is acutely on what the RBNZ will say and signal for next year.
• The new OCR track will be lowered. It has to. The RBNZ has already delivered more than the previous track implied. And in October the RBNZ signalled further ‘reductions’ in the cash rate – plural. We’d expect a lower terminal rate with the RBNZ keeping the door open to more easing.
• The recovery remains fragile. Greenshoots are emerging, but are few and far between. We hope a 2.25% cash rate will be enough for activity to spread. But we may need more. How the economy evolves over the summer period remains pivotal to the path of future policy decisions.

Next Wednesday, the RBNZ will take the stage for the last time this year. We’re expecting a 25bps cut to bring the cash rate down to 2.25%. The meeting will also mark Christian Hawkesby’s swansong as Governor of the RBNZ. Hawkesby passes the reins to Dr Anna Breman on December 1st. Though it’s not until February next year that she will make her mark on monetary policy.

A cut to 2.25% next week is perfectly priced by markets and requires little justification. The Kiwi economy still needs more support. Yes, the Reserve Bank has delivered a significant amount of easing. 300bps to be exact. But for the majority of this year, the cash rate remained at restrictive levels. It is only after the cut to 2.5% in October that policy moved beyond neutral ground and into more stimulatory territory.

We had long advocated for such a move to 2.5%. But the move came too little too late from the RBNZ. And the delay has cost us. The recovery we anticipated for this year stalled, activity lost momentum and Kiwi households and businesses have suffered further. All of which has put the Reserve Bank in a position of needing to do even more. They didn’t do enough, the economy stalled again, and now they’re having to do more to mop up the mess.

The question on everyone’s mind right now is, will the move to 2.25% be enough? We hope it will. But we may need more.

Accompanying the decision will be a fresh OCR track – the RBNZ’s forecast of the cash rate. We expect the track to be lowered (again) for two key reasons. First, the track must be lowered simply because of the October 50bps cut. The previous track troughed at 2.55%. The October cut took the cash rate below that to 2.5%. And next week’s cut would take it even lower. So naturally, the new track begins with a lower starting point. Secondly, let’s not forget the RBNZ’s forward guidance at the last meeting – “The Committee remains open to further reductions in the OCR ”. The key word here being “reductions” – plural. With this grammatical nugget in mind, we’d expect the RBNZ to keep the door open to further rate cuts in 2026. We expect the terminal rate to drop to about 2.15%, implying a modest easing bias. Anything below that would signal firm intention to cut below 2.25%.

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