The RBNZ Cuts 50bps, With More Cuts To Come. But The End Game Is Higher

• The RBNZ delivered on expectations, cutting the cash rate 50bps to 4.25%. There was no discussion of a 75bp move or a 25bp move… so the decision was straightforward. Anything other than a 50bp would have been a shock, and hard to explain.
• Today’s move was just the tip of the iceberg. The really interesting stuff was underneath. The RBNZ’s OCR track, which provides guidance on future policy moves, was lowered and pulled forward. It had to be… because they’re cutting in 50s not 25s. But the endpoint was lifted a little to 3.06% (from 2.98%). That’s bang on the 3.1% rate implied in wholesale rates.
• Our view has been tweaked, a little. More cuts are required. And we need the cash rate below 4% asap. We advocate another 50bp move in February… but we’ve lifted our forecast terminal rate to 3%, from a slightly accommodative 2.5%. We've made these changes on the back of the RBNZ's tweaks. But we note that the RBNZ may be too hawkish, again (as they were in May).

The rate cut we knew we’d get, but we still want more.

The RBNZ delivered. The cash rate has been cut again, by 50bps, to 4.25%. However, the path thereafter is higher than we expected. We had forecast a continuation of cuts to 3%, followed by a pause, and then a slightly stimulatory boost to 2.5%. Well now we just expect the RBNZ to stop at 3%. The RBNZ is more comfortable than we are with the economic scarring inflicted and likely recovery. We think the RBNZ’s bias may be moving in the wrong direction, as they did in May. They’re too hawkish. Time will tell. And we have a lot of time until their next decision in February.

For market players, there was no mention or consideration of a 75bp cut, or a 25bp cut in the record of the meeting… So, all the hype around 75bps fell of deaf RBNZ ears.

The argument for a 75bp move was fair. There’s a long wait for the next OCR cut in February. The RBNZ like their summer break, seasonally adjusted. So today’s decision is effectively a double decision, given the gap. But more importantly, we’re still a long way away from neutral. At 4.25%, rates are restrictive, and we’re deep in recession. We’re at least 75bps off the more pessimistic estimate of neutral at 3.5%, and 175bps off the lower estimate of 2.50%. No one sees neutral at 4% or above.

If you need more proof of the recession, and the pain inflicted, then Kiwisaver withdrawals is it. “Hardship withdrawals” have spiked from $10 million is January 2023, to $38 million in October. These withdrawals are not easy to make. “To withdraw savings you will need to provide evidence you are suffering significant financial hardship.” Significant financial hardship as a direct impact of restrictive monetary policy settings.

The admission of guilt may have been problematic. A 75bp move today would have been more of an admission that the RBNZ had overtightened. Even more so than the 50bp moves we’re getting – compared to the RBNZ’s August forecast of 25bp moves.

The argument for a 25bp move was premature

. A 25bp move wasn’t discussed. Although a 25 may get more airtime in February. We think the RBNZ will scale down to 25bp moves as the size of choice later in 2025, as they slow their approach to neutral. And the discussion of neutral took a leg higher, again. The long-term neutral rate was lifted from 2.75% to 2.9%. That’s significant, and points to a higher terminal rate. Hence, we adjusted our call higher.

© Scoop Media