Interest rate markets raise odds of big Official Cash Rate cut in October

The odds have lifted for a bigger rate cut from the Reserve Bank next month. Photo / NZME

New Zealand interest rate markets have raised the odds of an imminent 50-basis-point cut in the Reserve Bank’s Official Cash Rate after this week’s worse-than-expected growth data.

The overnight interest rate swap (OIS) market has factored in a 25-basis-point (bp) cut to 2.75% next month and has increased the odds of a 50bp cut to 40% after the release of gross domestic product (GDP) data, which showed a surprising 0.9% decline in the June quarter.

The influential two-year swap rate fell to 2.68% from 2.82% before the GDP release, while the New Zealand dollar has dropped to US58.9c from US59.65c.

The OIS market suggests the OCR could bottom out at 2.3% early next year, down from the 2.5% prediction before this week’s GDP release.

BNZ economist Doug Steel said rates had fallen across the swaps curve after the data.

Before the release, BNZ was the most pessimistic of the banks with its forecast of a 0.5% decline in GDP, but it is more optimistic about the current September quarter.

“There is a heck of a lot of money coming through the external sector, car registrations are pretty good and card transactions are picking up,” Steel said.

While there was an increased chance of a 50bp cut next month, Steel said much would depend on the data between now and the Reserve Bank’s OCR review on October 8.

However, BNZ economists are sticking with their central view of two more 25bp rate cuts in October and November.

Rabobank, in its analysis, said the economic conversation in New Zealand had shifted from a focus on fighting inflation to supporting growth and employment.

The Reserve Bank has already cut the OCR by a cumulative 250bps since August last year, the bank noted.

Rabobank has forecast cuts of 50bps in October and 25bps in November to take the OCR to 2.25%.

“We see potential for a further 25bp cut in Q1 2026 if growth does not stabilise close to trend,” Rabobank said.

Rabobank expects further falls in one to five-year bond yields and swap rates, but for 10-year bond yields to remain relatively elevated.

Westpac and ASB also expect a 50bp cut in October, followed by a 25bp cut in November.

Kiwibank has been calling for a 2.5% OCR for over two years and has made a case for a 50bp cut next month.

ANZ economists are taking an open-minded approach.

“Not cutting 50bps in October doesn’t rule out a 50bp cut in November and/or ultimately cutting the OCR lower than 2.5%,” the bank said.

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