All attention was on the RBNZ’s rate decision last week with many, including us, waiting with bated breath for what would unfold. Thankfully, the RBNZ delivered on what the Kiwi economy desperately needs. The cash rate was cut 50bps to 2.5%. A move we knew we should get, but one that was not guaranteed. The consensus view was for a smaller 25bps cut with commentators divided on the outcome. But ultimately, the weakness in the Kiwi economy saw the RBNZ pull through. And we’re glad they did.

We’ve now had 300bps of rate cuts delivered. It sounds like a lot. And it is. But until now, the rate cuts we’ve had simply removed the restrictiveness in policy, and had only taken us to neutral ground. The move to 2.5% finally positions interest rates towards levels that will inject stimulus into the economy. In other words, levels that should encourage households and businesses to spend, invest, and hire.

We don’t think the easing cycle is over yet. And the RBNZ is far from signalling the end. In fact, with just one word the RBNZ has kept the door open to a cash rate below 2.5%. “The Committee remains open to further reductions in the OCR”. The key word here – “reductions”. Forgive us for getting grammatical, but that little ‘s’ at the" end makes all the difference. In market-speak, the RBNZ has given themselves optionality. Financial markets have caught on, and started pricing in better odds of a move even below 2.25%. As we’ve previously pointed out, 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.

Inflation may be at the upper-end of the RBNZ’s 1-3% target band. But we think only temporary. And, importantly, the RBNZ have reaffirmed that they see it that way too. The weak undercurrents and ongoing spare capacity risk inflation falling below the 2% sweet spot in 2026. We’re concerned about the fragility in the recovery to date. Especially, with the ongoing risks offshore….

Speaking of which, news over the weekend has us travelling back in time to April with renewed threats of tariff escalation. Following China’s move to impose export controls on rare earth elements last week, President Trump retaliated by threatening to slap an additional 100% tariff on Chinese imports as early as November 1st.

According to Trump, whether or not this new rate goes ahead will depend on “any further actions or changes taken by China”. Though in true Trump fashion, it seems he may be backing down on his threat already. This morning, Trump posted on Truth Social telling us to not worry about China and that it will all, “be fine!” So, thanks Trump. That’s really reassuring….

We’ll be watching closely for further developments, and hoping for a quick resolution. The Tit for tat trade spat between the US and China (our two largest trading partners) doesn’t bode well for little ol’ Aotearoa. Weaker global growth and weaker Kiwi growth – that’s the last thing we need.

Financial Markets

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

In rates, an orderly 50bps cut sees the curve steepen

“RBNZ delivered a late in the cycle, but very orderly, 50bps cut last week. In the end it seemed to be more of a catch up move with no real weight put on the Q2 GDP miss. Instead, the MPC seeing the Q2 GDP miss as more supply driven weakness than that of spare capacity. This neatly translated to the terminal rate lowering by the 15bps that was not already priced for Oct and the curve steepening.

A cut in November now is seen as guaranteed. However, the chance of another 50bps is not yet appearing in market pricing. CPI next Monday will likely be the main catalyst for any reassessment of speed of future cuts. Though RBNZ seems relatively sanguine about the possibility of a CPI print outside its target band, on the face of it a print over 3% would make another 50bps a lot less likely.

Very light data week offshore with US government shutdown seeing delay to official statistics releases. Only really second tier data locally this week as well though forward looking PSI data will be interesting to see if any signs of a recovery.” Matthew Crowder, Balance Sheet Manager– Treasury.

In currencies, the Kiwi held its ground in the face of a dovish cut

“The RBNZ finally delivered the 50bp cut that was much needed to help get the sputtering Kiwi economy back on track. The Kiwi dollar reacted accordingly and fell from 0.5800 to 0.5741 versus the Greenback. It soon found support however, and bounced back to 0.5800 on Thursday. While the 50bp move was technically not the main expectation from traders, it was welcomed and was about 40% priced in already. The market reaction was therefore fairly muted overall. Pricing for another 25bp cut in November and potentially further cuts in early 2026, maybe to even 2.00% next year, have been taken in stride for the Kiwi. The NZDAUD move was similar, moving from 0.8815 to 0.8750 support and then back to 0.8800 the following day. Of more concern to close last week was the sudden escalation in trade tensions between the US and China. This has put the cat amongst the pigeons again, and a pull back in risk sentiment has seen the Kiwi back to the lower end of the 0.5700-0.5900 range that we are potentially in for some time. The US dollar index (DXY) was back above 99.00 last week as risk appetite waned. Gold and silver prices have continued to rise as risk aversion and buying of gold from central banks has continued. The NZDAUD has benefitted from escalating trade tensions, back above 0.8800. We see some of the moves in the NZDAUD cross perhaps lacking a bit of firm direction, as it is now at levels not seen since 2022. The interest rate differential is still playing a part, but we think for the week ahead trade tensions may end up being a major driver. For now we seen a bottom of 0.8750 that appears to be holding, even as traders increase their expectation that the OCR may end up closer to a terminal rate of 2.00%. The RBA however, appear to be at the end of their cutting cycle, with just 25bp of further easing expected, the timing of which is uncertain.” Mieneke Perniskie – Senior Dealer, Financial Markets.

Weekly Calendar

• Domestically, the September suite of price data is due out this week. Food prices may lift over the month, as was seen in August, but weakening growth and a deteriorating labour market should be keeping a lid on core inflation. Headline inflation for the September quarter (released on 20 October) will likely print at the top-end of the RBNZ's target band, but the focus will be on the core measures of inflation which should be soft.
• Across the Tasman, job growth likely rebounded in September. Around 20k jobs are expected to have been added over the month, following the surprise 5.4k drop in August. The unemployment rate is picked to lift slightly, from 4.2% to 4.3%, should the participation rate remain unchanged. A lift in the participation rate, with gains in labour supply exceeding new employment, however, will likely see a higher unemployment rate.
• UK jobs data will likely show that the labour market is beginning to stabilise with wage growth continuing to cool. Private earnings in the three months to August is expected to ease from 4.7% to 4.5%. The unemployment rate is expected to remain unchanged at 4.7%. The Labour Force Survey remains impacted by historically low response rates. But when taken alongside a broader set of indicators, all are pointed to a labour market operating below full employment.
• In the US, the government shutdown continues and is delaying the release of key data releases. The release of the September CPI report has been postponed to October 24. Instead, the focus for markets this week will be on Fed speakers and any further news on tariffs with China. Fed Chair Jerome Powell is scheduled to deliver a keynote speech this week, and traders will return from long weekend to renewed fears of a global growth slowdown.

See our "Weekly Calendar" for more.