Will they or won't they? Market expectations are finely balanced as to whether the Reserve Bank will cut its official cash rate.
Will they or won't they? Market expectations are finely balanced as to whether the Reserve Bank will cut its official cash rate.
Financial market pricing strongly suggests a cut in the official cash rate (OCR) is likely from the Reserve Bank of New Zealand (RBNZ) on Wednesday, but economists are not so sure.
While views among bank economists are mixed, all agree the direction of travel for rates is down, and soonerrather than later.
Emphatic market signals of an imminent rate cut were tempered by June quarter jobs data last week, which showed unemployment rose to 4.6% in the June quarter - slightly less than the market consensus forecast of 4.7%.
But then came Thursday’s third-quarter survey of inflation expectations from RBNZ that showed the two-year ahead measure falling to 2.03% - its lowest since the first quarter of 2021 - which added weight to the rate cut camp.
By Friday, the highly speculative overnight indexed swap (OIS) market was pricing in an 80% chance of a cut on Wednesday.
Westpac chief economist Kelly Eckhold expects the bank to keep its rate on hold on Wednesday, but he sees cuts later in the year.
“We think they will be positioning themselves to cut rates in the October and November meetings,” Eckhold said.
“They will leave open the option to scale up rate reductions beyond 25 basis points should conditions warrant but will be looking to discourage markets from getting too far ahead of themselves,” he said.
ANZ economists expect the rate to stay at 5.5%, and for the central bank to signal a potential cut later this year.
However, minutes from the monetary policy committee could reveal an OCR cut was at least considered.
ANZ chief economist Sharon Zollner said recent data pointed to a slowing economy and solid disinflation, which justified cutting the OCR far earlier than August 2025, as was signalled by the central bank back in May.
Zollner did not rule out a cut on Wednesday.
ANZ Bank chief economist Sharon Zollner.
“But there’s no smoking gun in the top-tier data, and our base case is that the monetary policy committee will conclude that waiting for more evidence of the state of play is justified - and relatively low-cost, given monetary conditions have already eased substantially,” she said.
“We continue to expect the first cut in November, with risks still tilted to it coming in October if the recent weakness in high-frequency activity data persists,” she said.
ASB senior economist Mark Smith said RBNZ’s inflation survey pointed to a cut.
“Our view is that inflation is effectively under 3% now,” Smith said.
“Looking ahead, the signs are clearly worrying for the economy,” he said.
“Not only do we expect inflation to fall below 3% in the second half of the year, we expect it to stay there, reflecting how we are seeing things for the economy in general and the labour market in particular,” Smith said.
ASB said that by cutting this week, RBNZ would be able to “take some of the narrative” back from markets.
“In particular, the Reserve Bank will want to remind markets that the future policy path is not set in stone and will be data and event-dependent.”
BNZ said an easing was already overdue.
“The New Zealand economy is buckling under the pressure of extremely tight monetary conditions, slumping net migration, Government cutbacks, rising unemployment, reduced investment activity and weak confidence,” BNZ said.
Kiwibank said restrictive monetary policy had “inflicted much pain and tamed the inflation beast”.
“Households and businesses are struggling.
“Almost all data have come out on the weaker side of expectations, and well below Reserve Bank estimates.
“Unemployment is rising, swiftly, and confidence in the economy remains at recessionary levels. It’s been two years of recession.”
Interest rate relief is required, and now, Kiwibank said, noting market traders were placing hefty rate cut bets.
“A cut in August is near-perfectly priced,” it said.
