We’re Moving Forward To The Past, And Calling For A 2.5% Cash Rate, As We Were Last Year

• Following a trio of 50bps rate cuts, the RBNZ slowed its pace of easing. The RBNZ delivered a 25bp cut, bringing the cash rate to 3.5% and completing 200bps of easing in just eight months.
• The downside risks we have all feared are coming from offshore and knocking at our door. We now call for a further 100bps of rate cuts to 2.5% by the end of the year.
• The outlook is weaker and global risks are escalating. The current environment simply demands more rate relief. And the Reserve Bank has rightly pronounced scope to lower the OCR further as appropriate.

The RBNZ stepped down its pace of cuts, from 50bp to 25bp, bringing the cash rate to 3.5%. That completes 200bps of easing in just eight months. Today’s cut came with no surprise, but was doused in dovish commentary. Like us, the RBNZ is rightly more concerned about the growing downside risks to global growth stemming from the tariff tit-for-tat. The outlook for the global economy has dimmed significantly. And as a small, heavily trade-dependent economy, our forecast recovery hangs in the balance. The RBNZ will need to step in to shore up confidence and support activity.

We have long-advocated for more stimulatory policy settings. In fact, we called for a 2.5% terminal rate prior to the RBNZ’s November MPS. But they let their hawkish flag fly high with a confusing lift in their OCR projections. We reluctantly lifted our forecast end point to 3%. We’re here to forecast what the RBNZ is likely to be (not so much what we think they should do). But we strongly warned: 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. Well, today, time is telling us that the RBNZ must lower the cash rate below neutral (3%). The downside risks we have all feared are coming from offshore and knocking at our door. We now call for a further 100bps of rate cuts to 2.5% by the end of the year. And with a 2.5% cash rate, all wholesale and retail rates have further to fall.

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