It’s not the OCR cut but the Monetary Policy Review that counts

The Budget Is unlikely to have much bearing on next week’s RBNZ OCR review and Monetary Policy Statement.

Economists says changes to the RBNZ’s outlook are much more likely to be driven by the global outlook.

Most economists have been locked into expecting a 0.25% OCR cut next week and attention will be on where the RBNZ will set the track and how much further the official cash rate might fall.

ANZ economists expect the tone of the RBNZ’s Monetary Policy Statement to be one of confidence and signal the OCR track to be 15-25bp lower – dipping under the 3% mark.

But chief economist Sharon Zollner says given the biggest factor this round is hand-wavy judgments about uncertain events rather than concrete data outcomes, the scope for a surprise is significant.

“In this kind of environment, there’s plenty of leeway for strategy to play a role, and we think the overall message the RBNZ will be wanting to send is “we got this, whatever happens”.

She says that speaks to a lower OCR track but not one that is designed to move market pricing from where it currently is – a trough of 2.86%.

“We continue to forecast the RBNZ will ultimately deliver an OCR of 2.5%, but we don’t expect tit to signal such an outcome at this stage.”

Inflation to keep firming

ASB expects an eventual endpoint OCR of 2.75% conditional on the expected mid-2025 lift in inflation proving to be transitory. 

However, the RBNZ’s new Business Expectations Survey that shows more than 600 businesses expect inflation to be lifting continually over the next decade but still stay within the central bank’s target band of 1-3%, ASB expects the RBNZ to be somewhat wary.

It says recent tariff headlines and concerns this will feed through into higher consumer prices have not helped either.

“It is important to place recent moves into context: inflation expectations are still close to the midpoint of the RBNZ’s target and remain well below the COVID-era peaks for most horizons, Nick Tuffley ASB chief economist says.

“The risk is that concerns over inflation see the RBNZ pare back monetary policy easing. We expect NZ inflation to continue to firm, peaking at just under 3% in the September 2025 quarter and to then move below 2½%,” he says.

Case for a bigger cut

What Kiwibank thinks the RBNZ should do and what it expects it to do are two different things, so it is eager to see the central bank’s latest assessment of both global and domestic economic conditions in next week’s Monetary Policy Statement.

Kiwibank chief economist Jarrod Kerr says there is arguably a case to be made for a larger 0.50bps cut given the economic backdrop.

“From our perspective, a 0.50bps cut would be justified and appropriate. We’d champion it.”

However, he believes the RBNZ will take a more measured approach and deliver a 25bps cut.

“Still, the magnitude of the cut matters less than the endpoint of the cash rate. And we continue to expect another 100bps of rate cuts to 2.5%. The RBNZ is slowly coming around to this view.”

Downside risks

Westpac has added an extra 25bp cut to the RBNZ's OCR in July to 3% to account for the downside risks to the economy coming from the global trade war and associated uncertainty.

While inflation was likely to remain in the upper half of the 1-3% target range, Westpac says the RBNZ is likely to reduce the OCR to 3% over coming meetings.

Given that uncertainties surrounding the global economic outlook are unlikely to quickly dissipate, a further 25bp cut seems more likely than not at either the July or August meetings,” Kelly Eckhold, Westpac chief economist says.

“This is likely to be the low point for this cycle, with the RBNZ expected to be cautious as it seeks to support the economic recovery while not reigniting inflation pressures.”

He says while there is plenty of water to go under the bridge over the next 18 months, the OCR will likely begin to rise in late 2026 if the economy unfolds as expected.

Scenarios could be provided

Existing lending rates are already priced on the assumption that the RBNZ cuts at the upcoming meeting and then follows through with two further cuts, the BNZ notes.

Was the central bank to rule this out lending rates could well rise and tighten monetary conditions even further.

BNZ chief economist Mike Jones says there is a strong argument for the RBNZ to indicate in its rate track further reductions.

“If it wanted to be hyper cautious it could leave the low point in the track unchanged from February at 3.1% while repeating its line ‘as the extent and effect of tariff policies become clearer, the committee has scope to lower the OCR further as appropriate’.

“Were it to do this we doubt current market pricing would change much.”

There have been some hints from the RBNZ that scenarios could be provided, Jones says.

“The BNZ would not be averse to this approach but given that the number of potential scenarios now verges on infinite, scenario analysis might indicate a degree of certainty about potential outcomes that is currently unwarranted.”

Whatever the RBNZ does, he says it needs to highlight, and highlight again, the massive uncertainty that is pervasive and the fact that such uncertainty means very little about the future can be taken for granted including future interest rate settings.