Official Cash Rate cut: New Zealand stocks stage relief rally after Reserve Bank cuts rate

Financial markets have given their verdict on today's cut in the Official Cash Rate. Photo / Sylvie Whinray

New Zealand stocks rallied sharply and wholesale interest rates eased after the Reserve Bank cut the Official Cash Rate (OCR).

The S&P/NZX50 index closed with a 2% gain, with most of the rise occurring after the central bank cut the OCR to 5.25% from 5.50%.

Financial markets have for some time been pricing in a rate cut, while opinion among economists had been mixed.

After today’s cut, market pricing suggests there will be 75 basis points (bps) of cuts by the time the Reserve Bank’s November 27 meeting rolls around.

The two-year swap rate, which has an influence on mortgage rates, fell by six basis points to 3.94%.

Most of the price action was on the sharemarket, which is sensitive to interest rates because of its high proportion of dividend-paying stocks.

“The market is relieved they [the Reserve Bank] didn’t dig themselves in a hole following the mistake of their hawkish May statement,” Salt Funds managing director Matt Goodson said.

“In our view, this is the right move as the feedback that we are getting is that current trading conditions are generally very weak,” he said.

Goodson said today’s market bore the signs of a “sharp relief rally”.

“We expect the August results season will be weak but that investors may look through that to at least some degree,” he said.

Craigs Investment Partners investment director Mark Lister said the market was looking through the Reserve Bank’s (RBNZ) bleak economic outlook, which was for negative growth in the June and September quarters.

“The picture looks brighter now that we are seeing interest rates starting to come off,” Lister said.

“Then you have that very simple impact of conservative investors getting less from their bank deposits and starting to look elsewhere in terms of what to do with their money, and the market is probably front-running a bit of that.”

For many, the cut is long overdue.

Capital Economics said that although the Reserve Bank seemed to strike a cautious tone about further policy easing, “we think it will cut rates more aggressively than many are anticipating”.

BNZ has long argued that the Reserve Bank should have cut rates as far back as May, when it maintained a “hawkish” stance.

The bank’s senior markets strategist Jason Wong said the market pricing reflected market expectations.

The May statement was just silly, when they threatened to raise rates again, he said.

“As it turned out, they have done the right thing and have responded to the data.”

HSBC said the move was a substantial pivot for the RBNZ.

“That said, New Zealand’s economy is weak, with GDP growth having stalled for almost two years,” HSBC said.

“It is clear that this has fed through to the jobs market, with the unemployment rate rising.

“We have long expected that inflation would get back to the target band by the third quarter and the RBNZ’s latest forecasts now align with this view.”

HSBC now expects to see more near-term cuts and sees the OCR hitting 3.75% by the fourth quarter of next year.

Kiwibank’s economists said they expected a 25-basis point cut at every meeting from here, well into 2026.

In the currency market, the New Zealand dollar fell to US60.35c from US60.70c just before the release. Against the Australian dollar, the Kiwi fell to A90.95c from A91.45c.

“The RBNZ are on a path back towards neutral of around 2.75%. We think they’ll hit 2.5%. That’s 300bps in total,” the Kiwibank economists said.

They said mortgage rates and business lending rates had a long way to go, south. “And so too do savings rates.”

“It’s the magnitude of rate cuts that impacts business decisions, and household confidence. We forecast, with a much greater degree of confidence, that 2025 will be a better year than 2024, and let’s put 2023 behind us.”

Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.