It was all on for the southern hemisphere last week with both the RBA and RBNZ delivering rate cuts.

Across the ditch, the RBA’s 25bps cut was the first in their cutting cycle. But potentially their last for at least a couple of meetings with the RBA coming out uber hawkish. Caution to cut was a strong theme throughout the RBA’s statement. And the bar for further rate cuts appears high. Governor Michelle Bullock went so far as to say that market expectation of three more cuts this year is “far too confident”. There were particular concerns around global uncertainty, and even more so about the ongoing tightness of their labour market. To which, the Aussie jobs data, published days after the RBA’s move, may have only added fuel to the fire. Employment growth in January was far stronger than expected, with 44k jobs added compared to the 20k forecast. While the unemployment rate did tick up to 4.1%, this was primarily due to a higher participation rate; yet another indicator underscoring the strength of the jobs market. Demand for labour remains robust, and no doubt the RBA will be concerned that a shift to lower interest rates could further fuel that demand and stall disinflation progress.

It’s a completely different story here at home. The RBNZ delivered the 50bp cut they virtually promised us in November (see our review). And better yet it seems like we’re all finally on the same page. Because the RBNZ lowered the OCR track again. Effectively matching market pricing and moved closer to our long-held view of a 3% terminal rate. There's only 10bps between us now. It pays to be stubborn. And we agree with the move. The RBNZ are signalling more cuts, sooner.

Here's the key dates: the OCR track implies a 25bp cut in April and May to 3.25%. And then there is a welcome drop to 3.14% to end the year. The track then flatlines at 3.1% out to 2028. That's the RBNZ's way of saying there's a 60% chance they go from 3.25% to 3%. You know, it's kind of needed, but we’re not quite there yet. In time, they should get to 3%. And the risks are to the downside.

We must point out that a 3.75% cash rate remains well above estimates of neutral - which are close to 3%. So, interest rates remain at levels that restrain demand. And after a severe recession, it's hard to justify. We have rising unemployment and inflation rangebound near target. Job done. Release the brake and put it in neutral. If anything, the RBNZ may need to stimulate, by putting the economy in drive, tapping the accelerator, and cutting below 3%.

The REALLY good news is that the RBNZ has tamed the inflation beast. And it’s time to drag the economy out of recession. With more interest rate cuts on the way, we see the economy recovering in 2025. Rate cuts are feeding through fast, with 81% of mortgages fixed for less than one year. That points to a firmer recovery in the second half of 2025. Along with gains in the housing market. And of course, 2026 is looking better than 2025, which will be a lot better than 2024.

Financial Markets

The comments below were provided by Kiwibank traders. Trader comments may not reflect the view of the research team.

In rates, the scene has been set

“A big week for antipodean rates, though in the end, more in the way of scene setting for the year ahead than for the here and now. RBA as the warmup act on Tuesday, came out strong with their first cut of the cycle though this was very much of the hawkish variety with the statement pouring cold water on a follow up cut any time soon.

Closer to home, the RBNZ’s long-awaited February MPS came and went with little to trouble markets, delivering the 50bp cut clearly telegraphed in November and set up more to come. The OCR track was moved closer to market pricing with cuts brought forward into 2025 though leaving the terminal rate largely unchanged.

The curve steepened up another 10bps this week as a lower policy rate and track from the RBNZ kept the short end in check. But rates 2 years and out continued to grind higher. With higher global yields dragging up the kiwi long end, while in the 2-year space fears of wave home loan fixing intensified further. However, with rates now at the top end of recent ranges, it seems there is now a bit more balance in the market and good two-way activity.” Matthew Crowder, Balance Sheet Manager – Treasury.

In currencies, the Kiwi dollar finds support as the RBNZ delivers on expectations

“Last week the RBNZ cut the OCR by 50bps. The initial reaction saw the Kiwi lower, hitting 0.5684 before recovering ground up to 0.5710 and then through to 0.5750, finding support. By the end of the week the Kiwi had hit a high of 0.5773 on the back of a lower US Dollar. The price action on the back of the RBNZ was perhaps unexpected, given the size of the cut, however the market had already priced in the cut. Some long NZ dollar positions that were perhaps put on in the off chance that the RBNZ would underdeliver on either the size of the cut, or more likely, their forward guidance, were unwound putting upward pressure on the Kiwi dollar. From here if the Kiwi maintains this break above 0.5750, we may trade higher into the 0.5800’s/0.5850. Currency markets have been less reactive to the threats of tariffs, as the reality around the actual administration and negotiation of said tariffs hit home. However, the tariff war is still very much an unknown and we anticipate that we will see increased volatility again at times. This is likely to keep a bit of a lid on how high the Kiwi trades for now, but we are seeing some optimism around the green shoots in the NZ economy. Inflation is returning to the RBNZ’s target band and growth forecasts for 2025 are on the upside.” Mieneke Perniskie, Trader - Financial Markets.

Weekly Calendar

• Here at home, retail sales data for the December quarter is due out this week. Household consumption was subdued for much of 2024 as interest rates weighed on wallets. After a 0.1% fall in the September quarter, retail sales likely lifted in Q4. Rate cuts began in Q3 which has helped lift consumer confidence. Monthly card spending data was surprisingly strong over December, with a near 2% lift in nominal spend.
• Across the Tasman, monthly CPI data is due out. Headline inflation is expected to pick up in January to 2.7% from 2.5%, boosted by increases in food and fuel prices. Of greater interest will be measures of underlying inflation, which are expected to continue easing and fall back within the band.
• The final inflation estimate for the Euro area likely came in at 2.5% in January, up from 2.4%. Broadly speaking however, generalised disinflation remains in place. The final reading will provide an update on measures of underlying inflation as well as services inflation which remains elevated. The minutes of the European Central Bank's January meeting will also be released this week. Market participants will no doubt comb through the report, looking for any hints on the timing of future rate reductions. The ECB delivered a dovish 25bps cut to all of its key policy rates in January. The dovish tone of the statement suggested another rate cut when the ECB meets again in March.
• Tokyo inflation gauges will likely show underlying inflation momentum strengthening. Tokyo CPI excluding fresh food and energy likely climbed to 2% from 1.9%. The update should offer further confidence to the Bank of Japan that inflation is stabilising at around its 2% target.
• In the US, data releases this week will likely show a contraction in personal spending over January and a continued slowdown in the Federal Reserve's preferred inflation gauge. US consumers likely pared back spend, with personal consumption likely declining 0.1% from a 0.7% gain in December, as sales for big ticket items dropped. Meanwhile, core PCE inflation likely ticked up to 0.3% from 0.2% off the back of higher prices for discretionary services. Base effects however may see the annual core inflation rate slow to 2.6% from 2.8%.

See our Weekly Calendar for more data releases and economic events this week.