Economists split on RBNZ OCR cut: How much will the Reserve Bank lower rates in February?

Debate among economists is starting to emerge on how much the RBNZ will cut the OCR at its next review on 19 February.

The major banks’ economists are mainly picking 0.50%. This is the number the RBNZ predicted it will cut by at its last meeting last year, but former BNZ economist Tony Alexander says it could now be as little as 0.25%.

He bases this projection on two issues – underlying business pricing pressures and monetary policy easings in Australia and the US.
Alexander says the need for New Zealand businesses to rebuild margins means that as the economy improves slowly through 2025, they will raise prices when they can.

Of most interest was December’s ANZ Business Outlook Survey showing the net proportion of businesses planning to raise their selling prices a year down the track was not in line with inflation falling back to 2%.  This peaked at 81% early in 2022, started 2024 at 50%, fell to 35% in June then rose from there. In December the reading was 43% from 42% in November. 

The net proportion of businesses saying that they expect their costs to go up in the next three months rose to a strong 70% in December from 63% in November.

“These measures are moving in the wrong direction.”

“Over the past few months confidence about the speed and extent of monetary policy easings in the United States and Australia has declined.

He says the key this year will be “mediocre” economic growth on the back of lower interest rates, higher dairy sector incomes, higher infrastructure spending, improving standalone house construction (but falling multi-unit building), positive migration flows, some recovery in household spending and business investment, some recent weakness in the NZ dollar and ending before the year’s end of the lagged response of employment levels to shrinkage in economic output recorded last year.

However, Alexander says there is no need for extra policy easing by the RBNZ to turn things around.

He also says the RBNZ might also look at developments offshore and exercise some caution.

“Over the past few months confidence about the speed and extent of monetary policy easings in the United States and Australia has declined.

“Most notably just this past week the expectations for the US have changed in light of a far stronger pace of jobs growth in December than had been expected.”

Employment rose 256,000 versus an expected 155,000 and the average rise of just above 180,000 a month throughout last year.

The US economy is in reasonable health and the labour market remains relatively strong with the unemployment rate at just 4.1%, Alexander says. 

“Throw in the risk of higher consumer prices because of likely tariff increases by incoming President Donald Trump and markets now generally only see scope for two more cuts by the Federal Reserve, as the economy is in better shape than previously allowed for.

“That was not expected as the Fed had predicted four cuts this year. However, one or two forecasters are picking no further cuts at all and some even think the first cut by the Federal Reserve last year was a mistake.

“The importance for New Zealand is the scope for falls in fixed borrowing costs Zealand for of three years and longer looks now to be limited.”

He says the changes in policy expectations in the two economies of greatest relevance to New Zealand have helped cause increases in medium to long-term bank borrowing costs. 
“The importance for here is that scope for falls in fixed borrowing costs in New Zealand for periods of three years and longer looks now to be very limited.

Another factor bringing caution here is the declining New Zealand dollar, Alexander says.