The OCR gravy train is slowing

After six consecutive drops, economists at the main banks say there will be a pause and possibly another cut in August. Some are even predicting further cuts in October and even February.

ANZ says whether the RBNZ cuts the OCR next week will be close-run after the recent dovish NZIER Quarterly Survey of Business Opinion (QSBO), but on balance it thinks it will remain unchanged.

It is now forecasting a cautious pace of cutting with 25 basis point drops in August and November and possibly a third cut in February to 2.50% best interpreted as a place holder for global headwinds, particularly confidence impacts.

Chief economist Sharon Zollner says the bank sees the data flow since May as dovish, easily justifying a cut next week. “We think the RBNZ should cut.

“However, on balance we think the central bank will decide it is prudent and low-cost to wait for more data on inflation – and inflation expectations – before cutting in August.

“But the decision is far from simple and at -20% we think the market is underestimating the chance of a cut next week. We’d put the odds at 40% plus.

“There’s likely to be a range of opinions in the RBNZ’s committee, and much to-ing and fro-ing, if our own deliberations are anything to go by.”

Zollner says the OCR track that is consistent with the bank’s macro forecasts versus the RBNZ is one of cautious cuts as it gradually becomes clear that risks have tilted towards medium-term inflation being too low, rather than too high.

“We see both consumption and non-tradable inflation undershooting RBNZ forecasts over the second half of the year, and therefore have a follow-up cut in November after another pause in October.”

The third 25 basis point cut in February, she says is in there because while global market turmoil has subsided dramatically as markets take a glass-half-full view, there is plenty of water to flow under the bridge – a fair bit of it this month as the US 90-day tariff pause expires.”

Zollner says while the bank doesn’t have sufficient confidence that “she’ll be right” to take that cut out of its forecasts at this juncture, it freely describes it as pencilled in.

Room for market determination

Westpac says the RBNZ is like to retain its easing but stay non-committal on when it might next lower the OCR.

Instead, Westpac chief economist Kelly Eckhold expects the central bank to give the market room to determine itself, based on data released up until the August Monetary Policy Statement, whether a cut to 3% will happen, be delayed until later in the year, or be cancelled altogether.

“We doubt it will judge recent economic momentum as materially weaker than previously expected – but it’s likely the RBNZ will point to some risk that such evidence might accumulate in coming months.

He says the RBNZ will also likely note that the near-term inflation outlook looks uncomfortably high.

Eckhold says a pause at this meeting is appropriate.

“There seems little risk of inflation moving far into the bottom half of the target range in the next year or two.

“The global economic environment looks less threatening than might have been feared a month or two ago.

“And importantly, it’s not clear when inflation will peak and at what level.”
Inflation increase likely

Although the BNZ expects the OCR to bottom out at 2.75%, it now doesn’t see any chance of another cut next week.

The bank believes the OCR will reach its 2.75% terminal rate in October.

BNZ chief economist Mike Jones says headline inflation is likely to increase towards the top end of the RBNZ’s target band in next quarter, but medium-term inflation pressures are contained.

“The bulk of the decline in wholesale fixed rates has likely already occurred with the RBNZ easing cycle now increasingly mature.”

The bank updated its OCR forecast after the QSBO on Tuesday. “While the report pointed towards weak inflationary pressures, we don’t believe it is sufficient for the RBNZ to cut the OCR in next week.”

Jones says the economy needs a bit more help. “But our broader view hasn’t changed: shorter-term retail interest rates have perhaps another 20-40bps of downside, but the bigger picture is we’re into the last dance of the downtrend.”

Uncertainty high

A higher bar is needed to sanction further OCR adjustments, ASB says.

The downward skew to risks suggests that monetary policy support will be needed, but given the highly uncertain and fluid outlook it is difficult to pinpoint when the OCR will be cut, Nick Tuffley, ASB chief economist says

The bank has pencilled in 25 basis point cuts in August and October.

He says the RBNZ has to overlay highly uncertain trade war impacts on top of an economy that is in the early stages of coming out of recession, with plenty of spare capacity, but with higher near-term inflation, he says. 

This is occurring at a time where monetary policy settings are being normalised, with the 3.25% OCR close to neutral estimates in an economic outlook that is two-sided.

Domestically, there are 225 basis points of OCR cuts due to flow through to the broader economy.

“Our estimates suggest that New Zealand’s average mortgage rate is due to reduce from 5.9% to 5.2% over 2025 - providing stimulus to kiwis which can then buttress a relatively fragile, but ongoing economic recovery.

“But then there are tariffs. Our previous analysis on tariff levels set on Liberation Day assumed~0.5% off annual headline GDP from increased protectionism and higher uncertainty.

“Estimates regarding fluid trade policy are largely futile. However, our judgment that tariffs still hurt economic activity remains,” Tuffley says.

A policy prescription of a 3% year-end OCR provides the RBNZ scope to offer support – one more 25bp cut – while also allowing time to evaluate inflationary pressures/ pricing behaviour – opportunities to pause, he says.