RBNZ: A steeper path to neutral – Standard Chartered

We now expect more aggressive rate cuts from the RBNZ with growth under pressure. We see two 50bps cuts in Q4-2024, taking the OCR to 4.25% (4.75% prior) by end-2024. We maintain our view for 125bps of cuts in 2025, and see the OCR at 3% by end-2025 (3.5% prior). The RBNZ’s concerns are now shifting towards growth, as inflation is expected to decline further, Standard Chartered’s macro analysts Bader Al Sarraf and Nicholas Chia note.

The Overton Window has gravitated towards a 50bps cuts

“We now expect the Reserve Bank of New Zealand (RBNZ) to cut the Official Cash Rate by 50bps each in back-to-back meetings in October and November. This takes our end-2024 OCR forecast to 4.25% (4.75% prior). Inflation is now well-positioned to edge down within the 1-3% target band in coming prints. But, more importantly, the growth backdrop remains sluggish.

“We think this necessitates an aggressive RBNZ stance, as front-loading cuts would reduce the risk of prolonged economic malaise. Accordingly, our end-2025 OCR now shifts to 3.0% (3.5% prior). This sets a shorter and sharper path to neutral OCR, estimated between 3-3.5% by the RBNZ. We think the balance of risks is skewed towards more aggressive easing by the RBNZ, as poor economic momentum translates to a negative output gap, which exerts downward pressure on inflation.”

“The RBNZ will likely emphasise the importance of acting swiftly to provide much-needed relief, as further delays could result in deeper economic contractions. Governor Orr acknowledged during the August meeting press conference that the committee discussed 50bps to start the easing cycle, but 25bps was seen as the consensus at the time. This was deemed a “low-risk start” by the RBNZ, further supporting the argument of shifting to 50bps cuts. We think the evolution of data since makes it easier for the RBNZ to justify shifting to 50bps cuts, as was the case in historical policy easing cycles.”