Westpac economists say there could even be a vote by the RBNZ’s monetary policy committee if members have different ideas on policy strategy. The choice will be a 0.25% and 0.50% cut.
The bank’s chief economist Kelly Eckhold says there could be more information released on individual members’ views. “Consequently, there could be a wide range of views on the policy path next year compared to the projected OCR.”
He says a 0.25% cut next week is well justified. “If a 2.25% OCR can’t do the job, then neither will a 2% OCR.”
He says a depreciating exchange rate will help rebalance demand in a constructive way in the medium term, while also implying inflation won’t fall far through 2%. “Having said that, a 0.50% cut will not be a policy mistake. “More important is to have a high bar on cutting the OCR below 2%.
Westpac is predicting a downward revision in the projected OCR track of about 0.30-0.35%, with a low point in the projection of about 2.20% in the first half of next year.
OCR easing could end soon
An end to the OCR cutting cycle is rapidly approaching say BNZ economists.
While the RBNZ will likely push the OCR down to 2.25% next week and the door has been left open to a February follow-up, chief economist Mike Jones says the hurdle to any further cuts is significant as the economy shows more signs of turning the corner.
“However, there remains much debate as to how far the RBNZ can push rates lower and there is no shortage of economic, policy and political uncertainty to contend with.
He says what the RBNZ does or doesn’t do is dependent on its medium-term view of inflation. “The key to that view will be where the output gap is now and where the RBNZ thinks it will head. “The wider the output gap, the greater the spare capacity in the economy, the lower is the inflationary pressure, the greater the ability to lower interest rates.”
Jones says this is where it gets confusing. The output gap is driven by the relative changes in aggregate supply and demand. An understanding of both is imperative.
“Survey measures of inflation expectations and pricing intentions seem relatively well behaved and don’t indicate the RBNZ should alter its stance.”
The key message is that the fourth quarter inflation figure should be confirmation that annual inflation has peaked and will be making its way toward the mid-point of the RBNZ’s target range, he says. “And while the currency might impose upside risks to forecasts, falling global commodity prices, particularly for dairy, should provide some offset.”
For the BNZ the RBNZ’s rate track will again be critical and decimal points will matter.
Given that things appear to be panning out broadly as the RBNZ has anticipated, then consistency dictates that the RBNZ (a) simply has to cut next week and (b) must keep the door open to a further move.
The point of interest Jones says is whether the RBNZ leaves the door ajar or widely open. “In our opinion a rate track troughing at about 2.15% would be appropriate.”
Interest rates could start rising next year
Short-term interest rates are expected to drop following a 0.25% OCR cut next week, but the ANZ is forecasting them to rise again next year.
With markets pricing in at least one more OCR cut, 90-day and two-year swap rates have already fallen in anticipation.
Ninety-day rates have less ability to look forward and are expected to fall from their current rate of 2.47% to a low of 2.30% in the first quarter of next year.
However, the two-year swap has much more ability to be forward looking, and it is expected to move only a few points lower to a low of 2.50% by year end. But it is expected to rise next year as markets start to contemplate OCR hikes, which ANZ has pencilled in from early 2027.
ANZ chief economist Sharon Zollner says long-end interest rates have bottomedout, and are expected to rise over 2026.
New Zealand’s 10-year bond yields have drifted lower in net terms since the beginning of August, falling from about 4.5% to a low near 4% before bouncing to about 4.1%.
“That move ended the long period of consolidation between January and August, with the fall gathering momentum as the RBNZ cut the OCR by 0.50%.
“But even at 4.1%, the 10-year bond yield is still only about 0.30% below where it was the day before the RBNZ started easing the OCT last August, in which time they have cut the OCR by tenfold.”
Zollner says the reason for this disconnect, which has created a steep yield curve (which, incidentally, is a boon for bond investors but a curse for borrowers) is that global drivers – in practice the US and Australia – remain influential.
The central banks of both countries have eased by less and are more cautious about how much capacity they have to cut, given inflation pressures.
Whereas the OCR is 2.50% in New Zealand, and markets anticipate the possibility of it falling to about 2.1%, the US Fed Funds rate is 3.87% and markets only expect it to fall to about 3.1%.
The contrast with Australia is even greater, with the RBA policy rate at 3.6% and markets expecting it to only bottom out at about 3.4%.
As a result, bond yields in the two countries have held up, supporting New Zealand bond yields too.
“All up, given our expectation US bond yields will drift higher over 2026, we expect New Zealand long-term interest rates to follow suit, keeping yield curves steep,” sZollner says.
Door left open for February cut
The OCR cutting cycle is not over, and the RBNZ is far from signalling the end, Kiwibank economists say.
The bank says the RBNZ has kept the door open to a cash rate below 2.5%.
In market-speak, the RBNZ has given itself optionality, Jarrod Kerr, Kiwibank chief economist says. Financial markets have caught on, and started pricing in better odds of a move even below 2.25%.
“As we’ve previously pointed out, we think there’s about a 50/50 chance of a further move to 2% in February. It will depend on how the data and recovery play out.”
While inflation is at the upper-end of the RBNZ’s 1-3% target band, Kerr thinks it is only temporary. “And, importantly, the RBNZ has reaffirmed it sees it that way too.
“The weak undercurrents and ongoing spare capacity risk inflation falling below the 2% sweet spot next year.”
He says concerns remain about the fragility in the recovery to date, especially, with the ongoing risks offshore.
“This summer will be an important time for data watching. Will the housing market pick up? Will consumer confidence lift into consumption? And will business confidence translate into activity? We hope it will.”
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