The Final Countdown To The Final Rate Decision Of 2024

• We’re just days away from the RBNZ’s final cash rate decision for 2024. And as we said even before their October meeting, we’re expecting another 50bps rate cut on Wednesday. It’s the right thing to do. We know it, the market knows it, and the RBNZ should know it too.
• The updated OCR track will be the focus, and has the most market-moving potential. We expect the track to be lowered, and rate cuts pulled forward. Another quarter will be added to projections, which we hope will signal a move closer to neutral
• The updated economic projections may also show a faster turnaround in economic growth compared to their last set of forecasts. Again, the outlook has improved marginally given the RBNZ has delivered more easing than expected.

Here’s our take on current events

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 (read here) 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%.

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.

Charts of the Week: A follow up 50

Going into this week’s RBNZ Monetary Policy Statement, a 50bps cut has become consensus amongst economists and market traders. And looking into next year, markets, like us, are hopeful for another 50bps cut in February.

One 25bps cut to start, followed by three 50bp cuts, while certainly needed, is an aggressive rate path that has pushed all wholesale rates lower. That is, until former US President Donald Trump was voted to return to the White House for a second time. Over recent weeks, US wholesale rates have catapulted higher on growing fears of ‘Trumpflation’ which surrounds the campaigned trade policies (tariffs). But if the RBNZ cut as we forecast, and signal more to come, we’d expect to see Kiwi rates holding in a lowering range, compared to the US. And that widening rate differential will enforce the weakish tone in Kiwi currency crosses. Anything less than 50bps on Wednesday, or a signal of fewer cuts to come next year, would cause a massive move in Kiwi rates, in the wrong direction (higher). So, it’s actually harder for the RBNZ NOT to deliver a 50bp cut. It would appease traders and keep wholesale rates where they are. It’s too early to get cute and risk rates rising.

However, looking further out, markets still don’t have enough priced into the long-term. The market implied terminal rate is still, in our opinion, too high at 3.24%. We want to see that terminal rate move lower towards neutral (2.75%) and perhaps even a bit lower to 2.5%.

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