Consensus among the country’s main banks is the OCR will be cut to 3.75% on Wednesday but after that all eyes will be on the RBNZ’s Monetary Policy Statement outlining its forecast.
ASB senior economist Chris Tennant-Brown says the RBNZ is more than half-way through its easing cycle and fixed home loan interest rates are now up to 2% below the peaks seen in 2022/2023.
However, he says ASB’s long-term view is significant falls for the longest-term fixed rates are unlikely, and upward pressure is developing from both events here and abroad.
He says first up: interest rate markets are volatile and can change quickly. Volatility in interest rates can flow through into mortgage interest rates. “It’s not a one-way street to lower mortgage rates.”
Secondly, Tennant-Brown says it’s not all about the RBNZ’s OCR announcements. Fixed-term mortgages have been moving across many maturities since the RBNZ’s November 2024 cut.
He says some of the fixed terms are now at or near the lows expected and the bank’s view is economic conditions suggest that mortgage interest rates will settle in a higher range than the historic lows struck during COVID-19.
“The bias for long term mortgage rates – declines over early 2025 focused on the one- and two-year terms. The longest terms could stay near current levels or potentially increase.”
Cut faster and harder
More interest rate relief is needed desperately to end the recession decisively, Kiwibank’s economists say.
While the RBNZ has all but guaranteed a 50 basis points cut on Wednesday, it’s not about that, but the trajectory, Jarrod Kerr, Kiwibank’s chief economist says.
“We’re focused on its next move(s). The RBNZ is saying just one more move (25bps) to 3.5% after next week. We're saying three more moves to 3%. “We’re hoping the central bank is flexible. It had to be very flexible last year. “
He says the weakness in the economy is clear and demands more attention and less restriction. “With all the risks offshore, think Trumpian economics, and the pain still felt onshore, there’s a good argument to be made for taking policy into stimulatory territory – that’s below 3%. Hopefully that’s not needed, but 3.5% is not the prescription we need. Cut harder and faster to recover easier and quicker.”
Kiwibank is arguing the case for the RBNZ not to muck around. “Cut to 3%, a neutral setting, and be on the watch to move into stimulatory territory if the trade wars bite us,” Kerr says.
“Get the economy moving. Ultimately, it’s better to act swiftly and decisively to be in a position to hike again in two years’ time when the economy has fully recovered.”
Below neutral
The BNZ says the RBNZ should cut the OCR by 25 basis points per meeting after Wednesday’s 50 basis points cut, until such time as it thinks it has done enough.
In theory, that should mean the cash rate falling to a level deemed as being below neutral i.e. one that is outright stimulatory.
The big debate, of course, is where is neutral?
BNZ research head Stephen Toplis says the recent speech by the RBNZ’s chief Economist Paul Conway confirmed the central bank sees neutral as being in a 2.5% to 3.5% band meaning that a working assumption of 3% is a good bet.
“On this basis we have a low in the cash rate of 2.75% pencilled in. It’s the same pencil we have been using since first forecasting this low point in the rate cycle almost two years ago.”
He says any number of reasons mean it might not land there but it still seems to be a good working assumption.
“As things stand the market has moved to price a similar rate track as our own.
“The two key differences are that the market prices a higher low of 3% and a relatively early first rate hike.
Toplis says the BNZ has no great gripe with the variation in the low which, just one 25 basis point rate cut different, but history shows that rates tend to stay at lows (and highs) for about nine to 12 months in the absence of a major economic shock. “We see no reason why this cycle should be any different.”
Unchanged terminal rate
Confidence by the RBNZ that medium-term inflation will remain close to 2% will come through in its Monetary Policy Statement next week, Kelly Eckhold, Westpac’s chief economist says.
Westpac sees the central bank projecting an OCR of about 3.25% by the end of the year and an unchanged terminal rate of about 3%.
“The bank’s short term economic growth projections may be revised down while the medium term path might be revised up modestly with the lower exchange rate,” Eckhold says.
Significant risks associated with global trade policies will probably also be noted he says, although few conclusions will be drawn given the significant uncertainties.
“The most likely dovish scenario is the RBNZ signals the intention to move the OCR to neutral more quickly by signalling a 3% OCR by mid-2025. This would signal a high chance of a further 50bp cut at the April review.”
Eckhold says there is an outside chance the RBNZ cuts the OCR by more than 50 basis points on Wednesday to try and bring the OCR to neutral more quickly.
Last of the big cuts
More caution is expected from the RBNZ once the OCR has been cut on Wednesday, ANZ bank says.
“This is likely the last 50 basis points cut,” Sharon Zollner, ANZ’s chief economist says.
“However, given the RBNZ’s central estimate of neutral is 3%, the risks are tilted towards a lower OCR trough than the 3.5% we are forecasting,” she says.
The bank is expecting the tone of the RBNZ’s Monetary Policy Statement to be one of confidence that the inflation outlook is benign, while acknowledging upside risks to tradable and thus headline inflation.
“The OCR track will likely be lower, due to the GDP surprise, but given capacity indicators have been mixed, and taking into account the offset from the lower NZD and higher export prices, we aren’t expecting a large change in the track overall.”
Zollner says the RBNZ is unlikely to feel the need to once again provide such explicit guidance about where to next, given the next meeting is just six weeks away.
“There’s a paucity of top-tier data between now and then, meaning the market is likely to be reluctant to budge from expectations.”
