What history tells us about the chances of a 75bp OCR cut next month

Friday, 11 October 2024

The Reserve Bank has cut the Official Cash Rate by 50 basis points, dropping it to 4.75%. The move has triggered immediate interest rate reductions across major banks, giving homeowners a break ahead of the holiday season. Zane Small reports.

Economists say a 75-basis point cut to the OCR could be on the cards next month.

History suggests the Reserve Bank may make a bold move before its three-month summer break.

A 75bp cut would take the OCR down to 4%.

Economists say a 75-basis point cut to the official cash rate (OCR) could be on the cards next month, with history suggesting the Reserve Bank may make a bold move before its summer break.

The RBNZ reduced the OCR by 50bp on Thursday, taking the rate from 5.25% to 4.75%.

Infometrics principal economist Brad Olsen says there is “real potential” for the Reserve Bank to consider a 75bp cut in November.

The move sparked a flurry of cuts to mortgage rates, many of which passed on the full 0.5% reduction to borrowers.

Economists were also quick to respond, shifting their focus to the RBNZ’s next Monetary Policy Statement on November 27, where timing could be a significant factor in the size of any potential cut.

Infometrics principal economist Brad Olsen said Thursday’s cut showed the RBNZ thought it needed to act faster to bring interest rates down.

That made it hard to believe it would slow to a “normal” 25bp cut in November.

“After November, the [Monetary Policy] committee takes a three-month summer break, and so we think there’s real potential for the RBNZ to consider a 75bp cut in November, to maintain the faster pace of easing, and as insurance over the longer break” he said.

“The committee can then come back in late February, assess how cuts to date have influenced the economy, and provide a fresh steer of where to next.”

While its next move was still data dependent, the numbers would need to show much larger cost or pricing risks for the RBNZ to pull back into the slow lane, he said.

ASB chief economist, Nick Tuffley, agreed the timing of upcoming OCR meetings would be a factor the central bank had to consider.

ASB chief economist Nick Tuffley says cutting by 50bp more than once would make the RBNZ “a bit of a central bank maverick.”

“The three-month gap over summer is unusually long, increasing the odds of November or February moves being larger than usual.

“The biggest OCR increase made over the last tightening cycle, of 75bp, occurred at a November MPS.”

However, Tuffley still expected a 50bp cut in November, given the still-high level of the OCR relative to neutral settings and the risk of the economy under-performing the RBNZ’s current assessment.

“Cutting by 50bp more than once would make the RBNZ a bit of a central bank maverick. But it is a reflection that the OCR, even at 4.75%, is still some way above neutral settings that we place in a 3% to 4% range,” he said.

Meanwhile, Westpac chief economist Kelly Eckhold said the RBNZ still saw the OCR at 4.75% as restrictive.

It was unlikely there would be anything in this month’s Consumers Price Index or November’s labour market report which would steer the bank away from another 50bp cut, he said.

The NZ Institute of Economic Research took a more conservative view and had pencilled in a 25bp cut in November, saying a “measured approach” to easing was still the prudent option.