Most economists expect the RBNZ to slash the official cash rate by 50 basis points on Wednesday. Photo: RNZ
- Economists and financial markets are almost certain of a 50 basis point OCR cut this week
- Experts say it will likely be the last super-sized rate cut
- Inflation within the Reserve Bank's target, spare capacity building
As the country's top monetary policy officials meet this week to review the Reserve Bank's benchmark interest rate, the decision appears to be a foregone conclusion.
A Reuters poll of 33 economists had 32 expecting the RBNZ to slash the official cash rate by 50 basis points on Wednesday, bringing the rate down to 3.75 percent.
It would mark the third consecutive jumbo-sized rate cut, as the RBNZ responded to weaker inflation and more spare capacity in the economy.
A big rate cut would be welcome relief for households looking forward to lowering their interest rate burden this year, and for businesses looking for sales to rebound.
While a half-point cut was almost viewed as a guarantee this week, the outlook beyond February was a bit murkier.
"Our base case is the RBNZ will cut by 25bp at each of the following two meetings, in April and May," ASB chief economist Nick Tuffley said.
"We assume events will keep the RBNZ comfortable that inflation will remain contained. The risks appear roughly balanced between spacing OCR moves out or delivering yet another 50bp. But events will matter," he said.
Tuffley said the RBNZ's easing cycle was nearing the end, and noted the decline in long-term wholesale interest rates had stalled.
"The risks are no longer one-sided: the RBNZ might not cut the OCR as far as markets already anticipate, and Donald Trump has at times pushed interest rates up," he said, referring to the president's trade policies.
Another factor was the number of borrowers that fixed short-term in the last year or so, as they prepared for an eventual fall in interest rates.
"The sheer volume of people looking to fix their mortgage rate soon could in itself push interest rates higher if everyone tries to run for the door at once and puts pressure on the wholesale rates that banks rely on for hedging," Tuffley said.
ANZ - the country's biggest bank - forecast just one more cut after a 50 basis point cut this week, a 25 basis point cut in April to take the OCR to a trough of 3.5 percent.
"In any case, we expect the RBNZ to start to tread more carefully now the OCR is approaching the RBNZ's range of estimates for neutral (2.5-3.5 percent). Barring significant downward data surprises, this is very likely to be the last outsized cut," chief economist Sharon Zollner said.
More cuts required - Kiwibank
Financial markets expected the official cash rate to fall to 3 percent in the third quarter.
However, market and economists' expectations were different to the RBNZ's most recent OCR track, which was the central bank's forecast of the cash rate.
The track forecast a 3.5 percent cash rate by the end of the year, which Kiwibank said implied 75 basis points of cuts this year, of which 50 basis points would be delivered this week. It also forecast a 3 percent cash rate to arrive in 2027.
"We've disagreed with the track from its very inception. With the 2 percent target inflation rate virtually achieved, we believe the RBNZ needs to take their hand off the handbrake and put policy into neutral," Kiwibank chief economist Jarrod Kerr said.
The so-called "Goldilocks rate" - where rates were neither too high nor low, was estimated by the RBNZ to be somewhere around 3 percent.
Kiwibank felt the RBNZ's November OCR track had proved too hawkish.
"And as such, we're expecting to see the OCR track pushed lower and pulled forward. That is to say, we expect more rate cuts sooner rather than later. Our view remains. We think a total of 125bp this year, to get us to 3 percent, is needed… with risk of more," Kerr said.
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