‘Alive: In 25’ Or ‘Thrive In 25’? Here’s Our Interest Rate Forecasts

• “Survive til 25, is now “Alive in 25” and could turn into “thrive in 25”. We all want a quick fix in 26 with no conflicts and less politics.
• We believe the RBNZ will continue cutting the cash rate, at pace, into the 3s. And then they’ll ease in incremental steps back to neutral, around 3%.
• Compared to our view, rates markets are adequately priced near term, but underpriced over the medium term. Basically, we’re saying the RBNZ will cut to 3.0%. Whereas market traders are hung up at around 3.35%. Time will tell. But the message for households and businesses is still one of rate relief. And the recession is over. Costs are coming down. Profitability is improving. And thoughts of reduction will turn to expansion.

Dance of the clairvoyants: Divination of the data.

“So save your predictions. And burn your assumptions” Pearl Jam

The crystal ball is cloudy, but the direction of the Kiwi cash rate is crystal clear. We need to see rates pulled lower over 2025, if the current lift in confidence is going to translate into activity, and then investment and hiring intentions.

We have been fierce advocates of lower rates. We believe rates were hiked too high, for too long, and we’re suffering the consequences. The swift reversal of heavy-handed hikes is needed to limit the economic scarring, which is becoming more evident in labour market data, business failings and financial hardship. 

The RBNZ leapt into action, slashing 125bps in just 3 meetings, with the explicit promise of another 50bp cut in February. That’s good news. The cash rate was 5.5%, it’s 4.25% now, and will begin 2025 at 3.75%. The speed at which the RBNZ has moved is clear recognition of the deterioration in the economy, with inflation no longer a problem.

If we look at the OIS (overnight index swap) curve, traders have adequately priced the next two meetings, in line with the RBNZ’s OCR track. The chart below plots the basis points per meeting priced out to 2026 (grey bars), alongside the implied cash rate (blue line). Traders have placed 42bps into the February 2025 meeting, followed by another 31bps over the April (-20bps) and May (-11bps) meetings, taking the implied cash rate to 3.52%.  And that’s pretty much it. The market implied cash rate hits a trough around 3.34%. So traders have placed a 16bp, or 65% chance (16/25), of a final cut to 3.25% - below the RBNZ’s near term track. 

It’s beyond the next few meetings where we believe the RBNZ’s track is too high, too hawkish, and takes too long to get back to neutral. Because of this, there is not enough cuts priced in by markets. We believe the RBNZ will be forced to lower their track (again), and deliver faster cuts.

Our near-term forecast for the Kiwi cash rate is unchanged. But we have had to lift the end point a touch, to 3% (from 2.5%).

 The continued need for rate relief is obvious, to us. Taking off the handbrake and putting policy in neutral is now the game. Although thoughts of neutral have risen. 

The chart above plots the RBNZ’s OCR track, Kiwibank forecasts, and current market pricing. We, along with the market, are ahead of the RBNZ over 2025 (blue arrow). That’s not unusual. Markets turn much faster than central banks. And market pricing will test RBNZ estimates.

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