Reserve Bank expected to stick to script and cut OCR by 0.5%

Monday, 17 February 2025

ANZ is only counting on one, ASB and Westpac tip two, Kiwibank is calling for three and BNZ’s “good working assumption” is that there will be four.

What we’re talking about is the number of interest rate cuts in the current economic cycle — after Wednesday, when the Reserve Bank is expected to stick to the narrative it laid out in its November monetary policy statement and cut the official cash rate by 50 basis points to 3.75%.

While there is agreement among economists on the action the central bank will take on Wednesday, a more complex outlook for inflation and interest rates both in New Zealand and overseas means they are more at sea about the number and size of future cuts.

Just ‘one’ from ANZ

ANZ, the country’s largest bank, said a 50bp cut would be consistent with forecasts, market pricing and the Reserve Bank’s own messaging in November, despite some “stickiness” in inflation.

But it expected more caution from the central bank thereafter, amid what it said were “clear signs” demand and activity had picked up.

Trading on financial markets suggests the OCR is most likely to bottom out at about 3% around the end of the year, while the Reserve Bank’s own forecasts suggest it falling that far by 2027.

But ANZ is only counting on one more 0.25% cut after Wednesday in the current economic cycle, which would take the rate down to 3.5%.

ASB and Westpac tip ‘two’

ASB chief economist Nick Tuffley is tipping two such cuts later this year and “a 3.25% OCR endpoint”, but made clear he did not believe that was locked in.

Lots had happened since the Reserve Bank’s last monetary policy statement in November, but its assessment of future inflation pressures wouldn’t have changed that much, enabling a 50bp cut this week, he said.

But “where to after February” was trickier, he said, with the Reserve Bank facing mixed inflation signals.

“The economy is showing some early signs that it has started growing again, but also that the response to last year’s sharp OCR cuts is slow, with little apparent risk of sparking a housing boom.”

Westpac is on the same page officially forecasting a 3.25% low.

But chief economist Kelly Eckhold also says there are scenarios that could require the Reserve Bank send the OCR lower, into “stimulatory territory”.

Kiwibank votes for ‘three’

Kiwibank sits towards the dovish end of the spectrum in calling for three further cuts after Wednesday’s “all but guaranteed” 50bp cut.

Chief economist Jarrod Kerr said the weakness in the economy was clear and there was a case for thinking the OCR would best drop below 3%.

“We argue the case 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.”

BNZ pencils in ‘four’

BNZ research head Stephen Toplis said its working assumption was the OCR would drop even lower, to 2.75%.

But further rate cuts would not necessarily mean a bonanza for borrowers on fixed-term mortgages, he cautioned.

“Financial markets have already priced-in an aggressive rate cut trajectory.

“This means that if the Reserve Bank doesn’t follow through with substantially lower rates then retail interest rates will begin to drift higher.”

The key question when determining how low the OCR would fall was where the Reserve Bank thought the “neutral” rate was, Toplis said.

That is the notional interest rate at which the economy could be running closest to capacity but with inflation still stable within the Reserve Bank’s target band.

Economists have been concerned the neutral rate may have risen recently in part because of the same structural problems in the economy that have seen the likes of council rates and insurance costs rise.

But Toplis is concerned economic indicators, other than sentiment, remain “moribund” and that unemployment is set to peak higher than forecast later this year at 5.5%.