A cut from the RBNZ on Wednesday week is all but a done deal. The RBNZ has delivered a significant amount of easing – 250bps to be exact. It’s a lot, and it does put the RBNZ among the most aggressive central banks. But, importantly, rate cuts to date have simply returned monetary policy to “neutral” settings. It is only this week’s eighth cut in the cycle that would work to add stimulus into the economy. Wednesday’s rate decision is pivotal in setting the trajectory in financial markets, and the wider economy, heading into 2026.

The current cash rate of 3% isn’t stimulatory, and it isn’t encouraging excessive behaviour or inflation. But we need a stimulatory rate if we’re going to encourage businesses to take on risk – either invest or hire. And we need a stimulatory rate if we’re going to see embattled households boost discretionary spend. 2.5% is closer to what we need. And the risks are towards a 2% cash rate, in our opinion.

We know that the cash rate will go to at least 2.50% by Christmas. Governor Christian Hawkesby signalled (rather explicitly) as much in his remarks at the Financial Services Council Annual Conference earlier this month. However, there are several routes the cash rate may take to get to 2.50% - and potentially below.

The first scenario...

is one in which the RBNZ cruises into next year on autopilot. Delivering a 25bps cut this week, and a 25bps cut in November. It’s a seemingly straight bat decision, but one that will no doubt trigger an unhelpful reaction in financial markets. Frustrated (again) by the RBNZ’s delay in getting the job done, wholesale market traders would push interest rates higher. The OCR endpoint priced into the OIS strip would lift from ~2.24% low towards 2.50%. The pivotal 2-year swap (interest) rate would rise from around 2.63% back above 2.80%, unwinding the 20bps post-GDP rally. Mortgage rates would barely move. And in fact, the risk further out turns towards a slight lift in mortgage rates. Very unhelpful. The Kiwi dollar would likely pop higher, back towards 59c. And that’s also very unhelpful. Our exporters could use a little currency depreciation to help offset the tariffs to the US

Given the fragile state of the economic recovery, with demand risks still abound, autopilot is exactly what we don’t need. Rather, awake at the wheel and driving the recovery into 2026 is.

The second scenario...

is one in which the RBNZ frontloads the signalled easing. The RBNZ could get to 2.50% in one fell swoop (a 50bps cut). But in the same breath, the RBNZ could also signal the end of the easing cycle.

The need for an accelerated move to 2.50% stems from the June quarter GDP figures. They were ugly. The Kiwi economy slammed into reverse, contracting 0.9% over the June quarter. This compares to the RBNZ’s forecast of a 0.3% contraction. The data may be old, but the miss is meaningful. The RBNZ will likely conclude that the output gap is more negative than last estimated. The RBNZ will be going back to the drawing board with a weaker growth starting point.

A ‘50 and done’ would still be consistent with the RBNZ’s forward guidance, but markets would interpret such a move as hawkish. We will likely see a similar reaction in financial markets as the first scenario, but perhaps not as strong. Because only 31bps are currently priced for Wednesday, meaning there’s still an element of shock to come from a 50bp cut. But signalling “that’s all folks” would see a recalibration in market expectations. Currently, a 2.26% terminal rate is being priced by early next year. But that would quickly lift under this scenario with the OIS curve pushing higher. Naturally, wholesale rates would sell off, limiting further (needed) downside to retail rates. And the decision might also light a fire under the Kiwi dollar as the RBNZ underdelivers on current market expectations.

The third scenario...

is what we think they should do. Like the second scenario, the RBNZ should deliver 50bps on Wednesday. But we think some extra juice is warranted. We have long-forecasted the cash rate falling to 2.50%. But it’s becoming clear that the economy needs more support. We expect a further 25bps cut in November to 2.25%.

In this scenario, wholesale rates would likely continue their downward spiral. Because a 50bps cut is not completely priced, and the signal for another cut in November should see expected cuts brought forward. Pricing for the November meeting should drop to 2.25%, and wholesale rates along with it. It’s not hard to see a ~10bp slide in the pivotal 2-year swap, easing towards 2.50%. All mortgage rates would likely be lowered, as needed. And the Kiwi dollar would lose further ground against most other currencies. Last week, the RBA once again emphasised a gradual and cautious approach to policy easing. A relatively tight labour market across the ditch affords the RBA patience. Similarly, the Bank of England is also stressing caution as it battles persistent inflation. Meanwhile, the ECB is virtually calling time on its easing cycle. All the while the Reserve Bank remains in a position of needing to do more. And in delivering more easing than its peers, interest rate differentials are working against the Kiwi. However, risks of a sustained weakening against the Greenback seem limited as the Fed resumes its easing cycle.

We hope that 2.25% is the cycle low in the cash rate. But we think there’s about a 50/50 chance of a further move to 2% in February. It will depend on how the data and recovery play out. This summer will be an important time for data watching. Will the housing market pick up? Will consumer confidence lift into consumption? And will business confidence translate into activity? We hope it will. It will all feed into the February decision.

Financial Markets

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

In rates, attention turns back to home

“Markets were largely subdued last week, with the US lockdown casting a shadow over activity and delaying key data releases. The RBA held its cash rate steady at 3.60% in a unanimous decision, aligning with expectations. However, the accompanying statement took on a more hawkish tone compared to August, hinting that rates may remain on hold for an extended period.

In the US softer ADP employment data weighed on US Treasuries, dragging NZ yields lower in tandem. US markets are currently pricing in -46bp of cuts over the next two meetings, with -24bp expected at the upcoming 29 October FOMC meeting.

Locally, attention turns to the QSBO and the RBNZ’s OCR announcement this week. Last week’s ANZ Business Confidence survey showed modest improvement from a low base, while housing posted a slight gain. Market commentators feel more biased towards a -50bp cut on Wednesday, markets less convinced with only -34bp is priced in. To keep greater than 6-month rates anchored, the RBNZ will need to either deliver a -50bp cut or signal a clear path of three consecutive -25bp cuts—starting with one and committing to more.

In support of a -50bp cut. At the August MPS two committee members supported a -50bp cut. Since then, GDP data has deteriorated significantly, funding spreads have widened by around +10bp, and banks have pre-emptively lowered fixed mortgage rates (given there is a total of -77bp of cuts priced). The question remains: what is the RBNZ waiting for? “Neutral” isn’t a number.

The QSBO, due tomorrow, could be pivotal in shaping market expectations. It excludes the farming sector, so it may present a bleaker picture of the broader economy. Current pricing reflects -34bp for October, -61bp for November, and a cumulative -77bp through mid-2026.” Ross Weston, Head of Balance Sheet Management – Treasury.

In currencies, the Kiwi dollar should take some direction from the MPR

“Last week was a relatively subdued for currencies. The US non-farm payrolls print that would potentially have provided more direction for the US dollar was postponed, due to the US Government shutdown. With the Democrats and Republicans still at an impasse, this has the potential to drag on, which will eventually start to weigh on the US Dollar. The DXY has held up well considering, only mildly lower, with the US dollar index (DXY) trading around 97.70. The Kiwi dollar managed to claw back some of its recent slide, trading up to a high of 0.5840 last week, and closing at 0.5815. The NZDAUD cross also got some respite, climbing off lows of 0.8760, despite the hawkish tone from the RBA last week, to a high of 0.8838. Direction from here should be decided on Wednesday, with the RBNZ’s MPR. The consensus view is that they will definitely cut, but the magnitude is in question. Will it be 25bp or 50bp? While we think that it should be 50bp, given the limited ability of an MPR to provide an OCR track guidance, this would have the potential to signal to the market that they will cut an additional 50bp in November, rather than 25bp. With the terminal rate priced at 2.25% currently, and pricing of a 50bp cut sitting at 30%, this would see a move lower in short end swap yields and the Kiwi dollar. The messaging will be key. If they deliver a 25bp cut, without providing a signal of a potential 50bp in November, then the Kiwi dollar will potentially head back to the 0.5900/0.5950 levels. NZDAUD direction is also pinned on the MPR. A correction lower to 0.8700 on a dovish cut, and conversely a cautious cut will see the cross back to 0.8950. Watch this space.” Mieneke Perniskie – Senior Dealer, Financial Markets.

Weekly Calendar

• It's the RBNZ's turn to take the stage this week. A cut is almost a complete certainty. The question is by how much. Market consensus is for a 25bps cut to 2.75%. We argue the need for an accelerated move to 2.50%, that is a 50bps cut on Wednesday. The accompanying statement will be of keen interest, with market participants seeking clues for the RBNZ's move in November.
• Ahead of the RBNZ, NZIER will release the Quarterly Survey of Business Opinion on Tuesday. From previous rounds, cost and pricing indicators suggest that inflation remains well contained. Now the focus is on the activity indicators for signs on whether economic activity will bounce in the September quarter - and if so, how strongly. Business confidence is on the mend, but the QSBO's activity measures have so far been lacklustre.
• Offshore, market participants await the September FOMC meeting minutes. Markets were surprised by the Fed's dovish signal for a 50bps cut this year. The meeting minutes may reveal a more hawkish tone with participants more sceptical about the pace of further easing.

See our "Weekly Calendar" for more.