Economists are maintaining a strong consensus that the Reserve Bank of New Zealand (RBNZ) will reduce the official cash rate (OCR) by 50 basis points at its upcoming policy meeting on November 27, bringing the rate to 4.25%.
Sharon Zollner, chief economist at NZ Bank, along with senior strategist David Croy, expressed confidence in a 50 basis point cut next week. They emphasised that this decision would be consistent with the RBNZ’s messaging from October, as well as prevailing forecasts and market pricing.
While the majority of economists advocate for a 50 basis point cut, some voices in the financial community are calling for more aggressive action. Investment manager Greg Smith has argued for a 75 basis point cut, positing that extreme measures may be warranted given the current economic challenges facing New Zealand.
ANZ Bank has indicated that if the RBNZ opts against a 50 basis point cut, a 75 basis point reduction is more probable than a 25 basis point one.
Zollner and Croy noted, “Markets are going into this meeting with around -53bps priced in, which is really an acknowledgement by markets that they see 75bp as more likely than 25bp, as do we.”
“If there is going to be a surprise, given the RBNZ’s confidence regarding the inflation outlook and the unusually long gap until the next meeting, a larger cut does seem likelier than a smaller one.”
BNZ head of research Stephen Toplis also supports a 50-basis point cut.
According to Toplis, “Fundamentally, economic spare capacity continues to grow and will do so for some time. Accompanying this, inflation will remain well contained around the 2% mark, and the unemployment rate will rise further over the next few quarters.”
However, he considers a 25-basis point reduction more probable than a 75-basis point cut. He said that the emergence of Donald Trump could signal the onset of a more inflationary environment.
These expectations suggest a need for a 25 basis point cut at both the October and November meetings, totalling a 50 basis point reduction, according to Toplis.
Furthermore, measures of inflation expectations from the RBNZ have seen a slight uptick.
“We are not bothered by this, but it does look like the out-turns are at the upper edge of what the RBNZ had anticipated and, hence, will have a dampening impact on the bank’s desire to cut.”
“We think the argument for a 25-basis point cut is marginally stronger than for a 75.”