The RBNZ is sharply in focus. And we’re excited. We’re excited about the 75bps of cuts we’ve had to date, the 50bps cut we’re expecting on Wednesday, and all the rate cuts we expect in 2025 as we continue on the path towards neutral. In our MPS preview we describe the RBNZ actions from October to February as timing beautifully to Tchaikovsky’s famous 1812 overture - well the last minute of it. Each cannon blast reflecting a 50bp cut. Each blast is flanked by furiously upbeat violins. And each violin stroke inspires us to charge into next year. Because next year will be a better year… by RBNZ design

Aside from the 50bp rate cut decision itself, the RBNZ will also provide us with a thorough update of their forecasts, including a fresh OCR track. The track highlights where the RBNZ sees interest rates going over the next 2 years. And despite the RBNZ’s claim of the ‘spurious accuracy’ of the OCR track, or the complete 180 degree turns we’ve had from previous OCR tracks, it’s the best mud map the RBNZ can provide for the future path of rates. One we can then pick apart and debate.

We’re expecting to see the OCR track pushed lower and pulled forward given the RBNZ has delivered more cuts than they anticipated in August. The August OCR track implied 25bp moves, and we’re getting 50bp moves, as required. And then there’s the culmination of data that has come in weaker than the RBNZ’s already low forecasts. Specifically, the inflation data for the September quarter that saw headline inflation fall to 2.2% - which compared to the RBNZ’s August forecast of 2.3%, and May’s forecast of 3.0%. That’s some move… back towards the RBNZ’S targeted sweet spot of 2% (see our full review).

But perhaps what we’ll be most on the lookout for is where the OCR track ends. Currently, the end point of the August OCR track is sitting at 2.98%. And, with an extra quarter added to the projections, we’re eager to see whether the end point is heading closer to 2.75% - the RBNZ’s estimated neutral rate - or remains around 3%. The former would signal greater confidence by the RBNZ that inflation will stay close to the 2% target.

It’s the end point for the cash rate which matters most. If the RBNZ wants to remove the restrictiveness of interest rates, they need to go back to a neutral setting (a Goldilocks rate that’s not too hot, not too cold). That Goldilocks rate of 2.75% is a long way from 4.75% today, 4.25% on Wednesday, and even potentially 3.75% in February. And we’re arguing that the RBNZ should cut to 2.5%, the lighter side of neutral, with a hint of stimulus to get things moving. That’s a big move in all rates, including mortgages, test rates, term deposits, and business banking lending rates.

It’s the magnitude of rate cuts that impacts business decisions, and household confidence. We forecast, with a much greater degree of confidence, that 2025 will be a better year than 2024, and let’s put 2023 behind us.

Financial Markets

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

In rates, Kiwi yields remained sensitive to offshore moves

“US rates consolidated last week after a US election induced sell-off. NZ yields very sensitive to offshore moves, compounded by expectations of further dovish rhetoric from this week’s RBNZ meeting. RBNZ, -50bp expected but 56bp priced! Global sentiment and yields swinging as the FED have signalled they are no hurry to cut rates, offset by a fresh wave of Russia/Ukraine tensions.

The RBNZ this week hinges on choices. A -50bp cut is expected taking the OCR to 4.25%, but discussion on -25 or -75bp are also important for direction. A discussion on either will leave the market none the wiser on direction which is probably the better option. Regardless, the RBNZ are well above neutral so another -50bp takes them closer to the mirage that is neutral. The RBNZ’s forecast OCR track will be revised down, ironically at a time when the market has reduced the amount of easing priced. We also get a Dec 2027 quarter tagged on the end, bearing in mind the August MPS had a 3.00% OCR low point vs 3.25% priced by the market currently. A continuation of a 3.00% low point won’t ruffle feathers, a further reduction will!

The RBNZ have played a straight bat to date. With domestic high frequency data looking less bad, dairy prices picking up, inflation expectation finding a bottom it feels appropriate to ease back on the pace of cuts in the new year. There are currently -47bp of cuts priced into February, the RBNZ will no doubt give themselves optionality…with a lot of weight on how quickly the US launch into trades tariffs post 20 January Trump inauguration. The RBNZ are already on the record calling the US election outcome inflationary, nevertheless expect a raft of questions in the Q&A.

On the mortgage front, the flow of new mortgage lending remains subdued, with many borrowers opting to fix their rates for shorter terms in anticipation of future rate cuts. This dynamic could shift if the RBNZ signals the end of its aggressive rate cuts or if there is a notable change in market commentary, prompting borrowers to consider locking in longer-term mortgage rates.” Ross Weston, Head of Balance Sheet – Treasury.

In currencies, the OCR track should provide some direction for the Kiwi

“And it’s here…the week of the final RBNZ rate decision for 2024. We think that they will deliver a 50bp cut, which is the path of ‘least regrets’. This is priced in, plus a little more, as some market participants have made the argument that a 75bp cut could be on the table. We don’t think this is a likely outcome, however the rationale around the calls being made by others are somewhat valid. We need rate relief. The economy is not looking flash by any measure. More cuts would certainly be welcome. What is more important than the cut itself, in terms of direction for the Kiwi dollar, is the updated OCR track from the RBNZ. This will go some way to providing direction on the timing of future cuts, and where the ‘neutral’ rate setting is according to the Reserve Bank. We have hit a couple of snags on the inflation forecasting front of late, with the RBNZ’s survey of 2yr ahead inflation expectations indicating that those surveyed see higher inflationary pressures in the 5 and 10year forecasts. And they’re potentially not wrong. We have ‘Trumpflation’ to contend with in 2025 as well. We still see the Kiwi dollar likely lower from here. Over the past week, the Kiwi has generally remained under pressure as the US dollar continues to take centre stage. We did see the US dollar briefly run out of steam last week and the Kiwi had a short lived relief rally, up to a high of 0.5922. We then traded back to a low of 0.5850, finding support there initially before another selloff on Friday that saw the Kiwi hit a low of 0.5817. A very dovish MPS on Wednesday, will see us test this level, with 0.5800 being the first support level to test next. We think there are valid arguments in 2025 for the Kiwi to head towards 0.5500 again, but that won’t be this week. Any upside surprises on the hawkish side of the coin, will be capped at 0.5950. We would need to see a 25bp cut with a hawkish leaning from the RBNZ to see the Kiwi in the 0.6000+ levels. For the other major Kiwi cross this week, namely NZDAUD, we did have a run lower to 0.8944 on Friday. This was on the back of hawkish RBA outlooks, where one or two major players have pushed out their forecasts for a first cut from the RBA from February to May 2025. Indeed the RBA minutes last week, were on the hawkish side. We also have Aussie monthly CPI this week, and upside surprises on that, in addition to confirmation that the RBNZ are dovish, will likely see the NZDAUD cross lower. We think it should already be in the 0.8800-0.8900 territory…but the cross is stubborn. This may end up being a pivotal week.” Mieneke Perniskie, Trader - Financial Markets.

The Week Ahead

• The RBNZ November Monetary Policy Statement is the main domestic event. Market consensus is for a 50bp cut to a 4.25% cash rate. It follows the 50bp cut at the October meeting. Of focus will be the RBNZ's updated economic projections and OCR track. The new forecasts may show a faster recovery in economic growth given the RBNZ has delivered more rate cuts than expected in August. In the same vein, the OCR track will likely be lowered and rate cuts pulled forward, given the easing delivered to date. See front page for our preview.
• Across the ditch, the October inflation print is due out. Headline inflation is picked to accelerate, from 2.1%yoy to 2.5%yoy, due to a low base. A slowdown in the monthly move however reveals the truer picture. Price pressures are easing. Core inflation gauges are also likely to continue falling, with the trimmed mean measure potentially moving back into the RBA's 2-3% band.
• The flash euro-area inflation print for November is expected o increase to 2.3% from 2%. The re-acceleration however can mostly be explained by base effects in fuel prices, when fuel prices dropped 3% last November. Core inflation will likely remain steady over the month. Indeed, the broader picture remains of generalized disinflation, which should enable the European Central Bank to continue cutting interest rates.
• In the US, market participants await the FOMC meeting minutes and the October core PCE deflator - the Fed's favoured inflation gauge. The minutes will offer insight behind the Fed's decision to deliver a smaller decrease of 25bp in November compared to the previous meeting. The meeting began one day following the US election. However, the minutes are unlikely to mention the results or the implications thereof given the little information known at the time. The core PCE deflator is expected to rise 0.3% in October, lifting the annual rate to 2.8% from 2.7%. The continue to drift higher and further from the Fed's 2% target, may prompt a more gradual pace of rate cuts from the Fed.

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