Reserve Bank of New Zealand: 50 or 75?

Markets and economists widely anticipate that the Reserve Bank of New Zealand (RBNZ) will reduce the Overnight Cash Rate (OCR) by 50 basis points (bps) to 4.25% on Wednesday, a move that would push the OCR closer to neutral levels.

Markets fully pricing in a 50 basis point cut

Markets are assigning a 60% chance that the RBNZ will opt for a 50 bp cut (60 bps of easing priced in), with a 40% chance that the central bank may swing for a bulkier 75 bp reduction. A 50 bp cut in the OCR would follow a 50 bp reduction in October and a surprise 25 bp cut in August.

I expect the RBNZ to follow through and reduce the OCR by 50 bps this week. Inflation has cooled to 2.2% in Q3 24 and is now within the RBNZ’s target band of 1-3% for the first time since early 2021. Inflation expectations also remain pretty much anchored around the 2.0% mark.

Economic activity (GDP – Gross Domestic Product) remains well and truly in the doldrums; Q2 24 data showed economic growth shrank by 0.2%, following a paltry 0.1% expansion in Q1 24. GDP per capita also contracted by 0.5% in Q2 24, coupled with a loosening jobs market. Employment growth showed a contraction of 0.5% in Q3 24, and the unemployment rate rose to its highest level since late 2020 (4.8% in Q3 24).

However, on the other side of this fence, some desks – such as Goldman Sachs – highlight the possibility of a 75 bp cut given the economic downturn, increased unemployment, and the long break between now and the next meeting (mid-February next year), which could leave the central bank somewhat behind the curve.

Global risks remain uncertain

The re-election of Donald Trump and potential tariff changes introduce a degree of unpredictability for New Zealand’s economy, particularly for tradeable inflation. Still, it is merely speculation at this point, and the implications for New Zealand's inflation are unclear.

I anticipate that the November statement will reflect confidence in the progress made on inflation, and the central bank will emphasise a gradual approach to policy easing, contingent on incoming data. With that being said, considering the economic backdrop, I imagine the quarterly projections may reveal additional rate cuts next year, with CPI forecasts potentially being revised lower, with limited revisions for GDP growth metrics.

NZD/USD in focus

A 75 bp cut would likely trigger enough of a ‘surprise’ and see the New Zealand dollar (NZD) sell off quite extensively, particularly against the US dollar (USD). In contrast, a 50 bp cut, which, as I noted above, is fully priced in, is unlikely to yield that much of a surprise/reaction, especially if dovish language is absent and the OCR projections are only moderately revised lower towards the end of 2025.

I will be keeping a close eye on NZD/USD during the rate announcement. An outsized 75 bp cut might trigger a strong downside move in the pair, particularly as investors have pared back US rate-cut bets – markets are now just pricing in 13 bps of easing for December’s meeting – as well as the USD being bolstered by the incoming Trump administration and safe-haven demand.

The monthly chart shows that price is trading at range support from N$0.5846, while the daily chart suggests scope to push for nearby support at N$0.5807. Therefore, daily and monthly support provides a ‘floor’ for potential buyers, which could hold if the RBNZ opts for a 50 bp cut. A 75 bp cut, nevertheless, could see the aforementioned support zone challenged.

Chart created using TradingView