We want to see the cash rate below 4%, asap. And we could be there, very early next year. The RBNZ’s decisive 50bp cut to 4.75% last week, opens us up for another decisive 50bp cut to 4.25% in November. It is with a sense of urgency, but far from panic, that the RBNZ is seeking to loosen its grip, and ease the restrictiveness of current policy settings.
Some commentators are now calling for a 75bp cut in November, to 4%. It is certainly in the realms of possibility. But we think it unlikely. We’re happy with 50bps, and will discuss another 50bp move, three in a row, in February. A third 50bp move would get us below 4%, at 3.75%. We think the RBNZ will slow down in February, however, and deliver 25bps. But we’d entertain 50bps. Beyond February we believe the RBNZ will cut in 25bp moves, towards 3%, with a sharp eye on inflation.
Our two charts plot market pricing for the RBNZ cash rate out into 2026. Market traders, and economists, have positioned for chunky 50bp rate cut in November, with the slight chance of a 75bp move. It’s unlikely. But traders always test the boundaries. The wholesale rates market (Overnight Index Swaps, OIS) has 56bps priced into the November decision. And the February decision has another 36bps priced to 3.83%, so that’s 70% chance of a third 50bp move to 3.75%.
The cash rate is priced to hit 3% by November 2025, a slight postponement in expectations from August 2025 (before the RBNZ’s decision last week). We forecast the OCR to hit 3% in August next year, with a terminal rate around 2.5%. The terminal rate in the market has lifted from 2.5% to around 2.75%. But we’re all on the same page. Our forecasts are not far from market pricing. It is the first time, in a long time, that market pricing, our forecasts, and the RBNZ’s likely OCR track (to be lowered substantially in November), will all line up.
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