- Three cuts, two 50bps, and one cash rate at 4.25%. In the final meeting for the year, the RBNZ delivered on expectation and cut the OCR to a 2-year low. The build-up of excess capacity has strengthened the RBNZ’s confidence and comfort around the inflation outlook.
- The OCR track shows more frontloaded cuts, with another 50bp in February as most likely. However, the new track is flatter than we expected. Like in May, the RBNZ’s bias may be moving in the wrong direction.
- StatsNZ recently announced changes to how they calculate economic growth. Changes that are likely to ‘technically revise’ away the depth of recession we’ve been in. But revisions or not, we’re still doing it tough. Our COTW is a reminder of the pain out there.
Last week, the RBNZ took the stage for the final time this year and delivered on expectations. The cash rate was cut for a third time, down 50bps to 4.25% (see our full review). However, the path thereafter is higher than we expected. We had forecast a continuation of cuts to 3%, followed by a pause, and then a slightly stimulatory boost to 2.5%. Well now we just expect the RBNZ to stop at neutral (3%), where policy is neither stimulating nor restraining the economy. The RBNZ is more comfortable than we are with the economic scarring inflicted and likely recovery. We think the RBNZ’s bias may be moving in the wrong direction, as they did in May. They’re too hawkish. Time will tell. And we have a lot of time until their next decision in February.
For market players, there was no mention or consideration of a 75bp cut, or a 25bp cut in the record of the meeting… So, all the hype around 75bps fell on deaf RBNZ ears.
The argument for a 75bp move was fair. There’s a long wait for the next OCR decision in February. The RBNZ like their summer break, seasonally adjusted. So last week’s decision was effectively a double decision, given the gap. But more importantly, we’re still a long way away from neutral. At 4.25%, rates are restrictive, and we’re deep in recession. We’re at least 75bps off the more pessimistic estimate of neutral at 3.5%, and 175bps off the lower estimate of 2.50%. No one sees neutral at 4% or above.
The argument for a 25bp move was premature. A 25bp move wasn’t discussed. And while the RBNZ have been very vocal about another 50 in February, a 25 may get more airtime then. We think the RBNZ will scale down to 25bp moves as the size of choice later in 2025, as they slow their approach to neutral.
The RBNZ’s modelled estimate of the neutral rate was revised up, again. The long-term neutral rate was lifted from 2.75% to 2.9%. That’s significant, and points to a higher terminal rate. Accordingly, we have adjusted our terminal rate higher. We still need more cuts. And we need the cash rate below 4% asap. We expect a third 50bp move in February… But we’ve lifted our endpoint to 3%, up from a slightly accommodative 2.5% on the back of the RBNZ's tweaks. But we note that the RBNZ may be too hawkish, again (as they were in May).
For our more visual audiences be sure to check out this quick 2-minute video from MJ with a quick round up of the RBNZ’s latest move and the outlook going forward.
Financial Markets
The comments below were provided by Kiwibank traders. Trader comments may not reflect the view of the research team.
In rates, the RBNZ’s MPS paved the way.
“Last week for Kiwi rates it was all about the MPS and the follow-on commentary. The RBNZ largely delivered an OCR cut and track in line with market pricing, though the forecast for Feb was quite ambiguous. Initially, this saw yields spike higher until Orr made clear another 50bps cut was the base case for February. Further muddying the waters, Orr gave a wide estimate of 2.5-3.5% for where the neural rate is. RBNZ clearly keen to get back into their comfort zone of measured 25bps cuts, perhaps also incorporating a few pauses, as they feel their way toward the nebulous neutral zone.
Key channel for transmission of easing via mortgage rate cycle now dependent on borrowers taking the plunge on longer tenor fixed rates. With higher bank funding called out as potentially also seeing home loan rates elevated slowing the speed of transmission.
The other big theme for the week was a material flattening of the curve with long end rates down 10bps while the front end largely unchanged. This was more an offshore story with market friendly Treasury secretary pick seeing US treasuries now back at pre-election levels. Remaining big events this year domestically are GDP and HYEFU. In absence of local catalysts US Employment data, likely to set the direction for the week.” Matthew Crowder, Balance Sheet Manager – Treasury.
In currencies, Kiwi dollar remains supported as the OCR heads lower.
“Last week’s MPS ended up being a bit of a fizzer when it came to providing a directional pivot for the Kiwi dollar, however it has provided some support for the Kiwi, within its recent range. The Kiwi dollar traded in a relatively tight range last week, considering it was a key one for data. The Kiwi opened last week at 0.5833 and traded to a high of 0.5908 on Wednesday night following the MPS. Friday night saw the Kiwi trade through to a high of 0.5929. So we are well back from the 0.5797 that we briefly touched on last week after Trump came out swinging by social media, threatening broad sweeping tariffs. The RBNZ delivered a 50bp cut to the OCR which was expected. There had been some market participants that made a fairly solid argument for a 75bp cut, so there was some strength in the Kiwi as it became clear that the RBNZ had not considered a larger cut. Their OCR track shows that they expect that the OCR will be circa 3.55% by the end of 2025. The RBNZ see that we need urgent rate relief, but like many central banks, they are also concerned about a potential resurgence in inflation. 2025 could potentially see inflationary pressures rise again globally, particularly with Trump back in the White House. The aforementioned threats of trade tariffs are already pushing markets around, which was apparent last week. NZDAUD opened the week at 0.8973 and traded to a high of 0.9097 on Wednesday. We didn’t manage to crack the 0.9100 level, and open this week at 0.9070. This week the major data points are US non-farm payrolls, and Aussie GDP.” Mieneke Perniskie, Trader - Financial Markets.
The Week Ahead
- Here at home, more partial GDP data are due out. The value of building work put in place will likely show continued weakness within the industry. Construction activity fell 0.2% over the June quarter, with both residential and non-residential activity running backwards. The September quarter will likely show further declines in activity given high interest rates, weak broader economic activity and a lacklustre housing market.
- Across the ditch, the Aussie economy likely expanded 0.4% over the September quarter, slightly faster than the 0.2% increase in Q2. However, the result is relatively weak when taking into account strong population growth. Residential construction and business investment may show some gains following recent weakness. On a per capita basis, GDP likely contracted for the seventh straight quarter.
- The main economic event this week is the November US jobs report. Jobs growth likely rebounded following the slowdown during the weather-disrupted month of October. However, it's not the kind of rebound one would expect if October's weakness was solely a result of the cyclone (temporary factors). Rather the soft print reinforces the negative cyclical dynamics in play as the US Federal Reserve's rate hikes take effect on the labour market. Around 200k jobs were likely added over the month, as the underlying pace of employment continues to slow.
- Several central bank officials are scheduled to speak throughout the week, including US Federal Reserve Chair Jerome Powell, ECB President Christine Lagarde, and BoE Governor Andrew Bailey. RBNZ Governor Adrian Orr is also on the newswires with a media interview out on Wednesday. The interview is highly anticipated following the RBNZ's November 50bps rate cut.
See our Weekly Calendar for more data releases and economic events this week.
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