The Reserve Bank is expected to cut the Official Cash Rate on Wednesday, but how deeply it will cut remains far from certain.
With markets currently pricing in the cut as a certainty, the debate is now about how big it will be, ANZ chief economist Sharon Zollner said.
Zollner and the ANZ team are picking a 25-basis-point (bps) cut.
“We think the deciding factor will be strategy. A 25-basis-point cut with plenty of dovish messaging around it reduces the risk of needing to change direction abruptly down the track, and it leaves maximum options open.”
The trade-off against a deeper cut – that monetary conditions would not be quite so easy over the next six weeks – would likely be judged acceptable, she said.
Economists at BNZ also lean towards a 25bps cut.
“We’re sticking with our central view of two more 25-basis-point rate cuts, in October and November, for the time being,” BNZ senior economist Doug Steel said.
“The market appears to have come to a similar conclusion recently, paring the odds of a 50-basis-point cut in October.”
But there was a very real risk that a battle-shy Reserve Bank (RBNZ) suffered “sticker shock” from the second-quarter GDP outcome and was not willing to wait for the third quarter GDP outturn to be published in December, he said.
Westpac economists believe the RBNZ won’t be prepared to wait.
“In our view, there doesn’t seem to be a good reason to delay a move to 2.5%,” Westpac chief economist Kelly Eckhold said.
“Quickly moving the OCR [Official Cash Rate] to a stimulatory level will boost confidence and activity before the important Christmas and summer trading period.”
It would also reduce the likelihood that even further monetary policy support was required in the new year, he said.
At Singapore-based Capital Economics, senior economist Abhijit Surya also sees a 50bps cut as most likely.
Surya said although financial markets are not fully convinced, his team believed the Reserve Bank of New Zealand will lower its policy rate by 50bps.
“With the output gap deeply negative, the committee will want to mitigate downside risks to the medium-term inflation outlook.
Surya then expected it to close out the easing cycle with a 25bps cut next month, “giving incoming governor Anna Breman a fresh start when she takes office in December”.
ASB economists echoed that view.
“The fire of recovery needs more accelerant. The OCR needs to go lower than recently thought, to a low of 2.25%, to get monetary conditions more into stimulatory territory,” ASB chief economist Nick Tuffley said.
“Our concern is that there are only a few catalysts for recovery to cling to. The main things the economy has going for it are interest rates falling back to more normal levels and a burst of good export incomes.”
Kiwibank economists are also in no doubt about what they think the RBNZ should do.
“The RBNZ has signalled reaching 2.50% by the end of the year. If it was up to us, we would get there next week with a 50bps cut,” they said.
The broad-based weakness in the Kiwi economy warranted “a bold move”.
The Kiwibank team suggested that the RBNZ should also signal another 25bps cut in November. next month.
Anything less would push interest rates higher, given it would disappoint markets, they said.
“Unhelpful. And the opposite of what the economy needs.”
The current cash rate of 3% wasn’t stimulatory, and wasn’t encouraging excessive behaviour or inflation, they said.
KiwiBank sees a 50% chance that another 25bps cut will be needed in February, taking the OCR to 2%.
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.