Danger OCR might need to be hiked in 2026

Westpac chief economist Kelly Eckhold says given the RBNZ expects to cut the OCR by a total of 0.75% over the next year, this represents an unusual degree of front-loading of the remaining easing cycle.

"The RBNZ has been unusually explicit about the size of the next move and seems to be setting a high bar for any deviation from the expected 0.50% cut in February."

Eckhold said that Orr has indicated he sees the 'neutral' OCR as likely in a 2.5-3.5% range, although the range implied by the RBNZ’s 'indicator suite' suggests a range of 2.9-3.6%.

“We suspect there are a range of views within the MPC on where the neutral OCR lies and the performance of the economy from here will be the deciding factor.

Nevertheless, by indicating that after February the OCR will be cut more slowly, they are acknowledging that the neutral rate may be close,” Eckhold says.

He suspects the RBNZ's assessment of the neutral rate is too low and little further OCR easing will be required after early 2025.

Significant risk to the exchange rate while global interest rates remain elevated will likely limit the RBNZ’s scope to ease too far next year, Eckhold says.

“If the RBNZ has under-estimated the level of the neutral OCR significantly then there is a risk it will over ease next year, potentially setting up the next tightening cycle in 2026.”

Taking too long
 

It is not a view Kiwibank chief economist Jarrod Kerr agrees with. He has been vocal that the RBNZ needs to cut the OCR quickly to 3% next year.

"The crystal ball is cloudy, but the direction of the Kiwi cash rate is crystal clear. We need to see rates pulled lower over 2025, if the current lift in confidence is going to translate into activity, and then investment and hiring intentions.

"The continued need for rate relief is obvious, to us. Taking off the handbrake and putting policy in neutral is now the game."

He says it is beyond the next few OCR meetings where he believes he RBNZ’s track is too high, too hawkish, and takes too long to get back to neutral.

Kerr says there are not enough OCR cuts being priced in by the wholesale interest rates market and the RBNZ’s forecast track is too slow. “It will be forced to lower its track (again), and deliver faster cuts.

"We believe rates were hiked too high, for too long, and we’re suffering the consequences," he says.

"The swift reversal of heavy-handed hikes is needed to limit the economic scarring, which i.s becoming more evident in labour market data, business failings and financial hardship.”

What has surprised Kerr in the RBNZ’s latest Monetary Policy Statement is the time it takes to get the OCR back to neutral.

“According to the RBNZ”s track the cash rate finishes the end of next year at 5.5%. That’s just 0.75% of cuts over the entire year, of which, 0.50% is delivered in February. And the final move to 3% does not happen until deep into 2027. It’s a strange track.”

There is an argument the RBNZ should frontload cuts to 3.5%, which Kerr agrees with.

Goldilocks housing market

Meanwhile, stable prices, strong stock levels, falling interest rates, and rising buyer activity is creating a ‘Goldilocks’ market for buyers and sellers, realestate.co.nz says.

The latest data paints a picture of balance: property prices have remained steady for nearly two years, hovering between $850,000 and $890,000, while healthy stock levels – up 21.3% year-on-year—are giving buyers substantial choice.

At the end of November, the website had a substantial 33,984 residential properties available for sale. That is up 21.3% compared to November last year, and is the most properties the website has had available for sale in any month of the year since April 2015.

Sales activity is also gaining momentum, with the Real Estate Institute of New Zealand (REINZ) reporting more than 6,500 properties sold in October—the highest monthly total since March 2022.

Website spokeswoman Vanessa Williams says after tracking the property market for 18 years, “this is one of those rare moments where certainty and opportunity align, creating a true “Goldilocks market” that benefits buyers and sellers.

After two years in the doldrums with falling prices, she says this isn’t a frantic housing market rebound. “It’s a steady uptick that provides confidence for both buyers and sellers.

“Debt-to-income (DTI) ratios are also helping to maintain this equilibrium, ensuring buyers make measured decisions while keeping investor activity in check.”

The national average non-seasonally adjusted asking price of the properties for sale on realestate.co.nz was $863,503 in November, down $29,854 (-3.3%) compared to October.