RBNZ seen cutting rates further, faster than it currently forecasts

NEW Zealand’s central bank will cut interest rates further and faster than it says it will as the economy contracts and inflation slows, according to investors and some economists.

The Reserve Bank of New Zealand (RBNZ), which embarked on an easing cycle last month, will take its Official Cash Rate (OCR) to 2.5 per cent by mid-2026 from 5.25 per cent today, market pricing shows, a view shared by economists at Capital Economics and Kiwibank. That’s despite the RBNZ projecting the OCR will trough at 3 per cent from around the end of 2026.

“If we look back at the start of previous easing cycles, the Bank has always underestimated how aggressively it would end up cutting rates,” said Abhijit Surya, Australia and New Zealand economist at Capital Economics in Singapore. “We think this time won’t be any different.”

The central bank has already made an abrupt change to its policy stance, cutting rates by a quarter percentage point Aug 14 after threatening to raise them just three months earlier. Markets are betting it will be forced to reverse course more aggressively as a prolonged period of elevated borrowing costs chokes demand.

Gross domestic product data next week are expected to show the economy shrank in the second quarter, putting it on the verge of its third recession since late 2022.

Tax cuts

To be sure, government tax cuts that took effect on Jul 31 may support domestic spending and a recovery in the key tourism industry could also boost economic growth.

Of the nation’s four largest banks, only economists at Bank of New Zealand forecast the OCR will fall below 3 per cent. At the other extreme, Westpac expects the benchmark to bottom out at 3.75 per cent.

Still, inflation has slowed more than expected, to 3.3 per cent at the end of June, and the RBNZ now projects it will return to its 1 to 3 per cent target band this quarter. Indeed, selected components of the Consumer Price Index published today suggest annual inflation slowed sharply in August.

Unemployment is rising as the manufacturing and service industries contract and households rein in spending.

“If the RBNZ wants to remove the restrictiveness of interest rates, they need to go back to a neutral setting,” said Jarrod Kerr, chief economist at Kiwibank in Auckland. “That Goldilocks rate is estimated by the RBNZ to be around 2.75 per cent, a long way from 5.25 per cent. And we think they will need to go a little below, to 2.5 per cent, to get things moving.”

While Kerr expects the cuts to be delivered in 12 consecutive quarter-point increments, Surya predicts a more rapid easing, with the inclusion of three half-point reductions taking the OCR to a low of 2.25 per cent by the end of next year.

Financial markets see a further 75 basis points of cuts over the final two rate decisions of this year, suggesting one of them will be a 50-point reduction. The RBNZ’s remaining 2024 decisions are on Oct 9 and Nov 27. BLOOMBERG