Further cuts to OCR might be forced on RBNZ

Market traders are factoring in more cuts as inflation is tame, the labour market softens and the impact of tariffs is likely to lower demand, growth and interest rates.

The New Zealand-owned bank, which is often more optimistic than its Australian rivals, says it’s a big, bold and beautiful bull steepener as interest rates fall towards its target of 2.5%.

“We expect rates to rally, hard, (so interest rates fall…when the price of bonds increase the interest rate decreases), led by the front end,” Jarrod Kerr, Kiwibank chief economist says.

If there is an OCR cut to 2.5% and not the RBNZ’s prediction of 3%, it will drag short-dated one- and two-year rates lower. It’s a strong bull steepening, Kerr says.

“The market is slowly coming around to this view, and has been for a while.”

Offshore data is also supporting Kiwibank’s local view.

Inflation in Australia is weaker, revitalising debate around a lower RBA cash rate. And weaker US payrolls, with huge downward revisions, reopens the door for the Fed’s “too late” Powell to cut again.

The BoC was also unmoved last week, but calls for cuts are getting louder and louder.

“When you see other major economies becoming more comfortable with the inflation environment post US tariffs, it settles the nerves of some of the RBNZ Monetary Policy Committee members,” Kerr says. 

“So while our wholesale rates have drifted lower in recent weeks, the next big move could be lower, and steeper.”

He says in other “good news”, the Kiwi dollar has dropped below $US60c. That is helpful for exporters faced with a 15% tariff on goods headed to the US. “The weakening currency makes Kiwi exports cheaper to foreigners, exactly as the currency is supposed to do.”

On Thursday the RBNZ will release its survey of inflation expectations. Inflation is heading higher and near term expectations will likely follow, Kerr says. “It’s a move in the wrong direction.

“But headline inflation in the high twos would be an easier pill for the RBNZ to swallow if the longer-term inflation expectations remain close to 2%,” he says.