Kelly Eckhold says a lot has changed in the past week and he expects the RBNZ this week to indicate 'a firm intention to get the Official Cash Rate to 3% soon'

Westpac chief economist Kelly Eckhold says a lot has changed in a week, and he thinks the Reserve Bank (RBNZ) should this week indicate a firm intention to get the Official Cash Rate (OCR) to 3% soon.

In February the RBNZ virtually promised that it would cut the OCR by 25 basis point to 3.50% at its next review on Wednesday, April 9.

Last week Eckhold, in his preview of the OCR decision said he thought the RBNZ would go ahead with the OCR cut as promised - but he thought it would be the wrong thing to do. "No change with an easing bias would be the right thing to do," he said then.

However, in a Monetary Policy Review Update issued six days later, Eckhold says: "The balance of risks has shifted a lot in just one week. Hence, it’s important to update the view." 

He noted that markets have moved to price in risks of a much lower OCR over 2025 "as the bomb that the US administration detonated on global trade reverberates".

"The news of rounds of retaliation between China and the US imply very elevated global growth risks. And that bodes poorly for the New Zealand outlook."

Prior to the 'Liberation Day' announcement of tariff hikes by the US administration on Thursday of last week, our time, the financial markets were pricing in a low point of just above 3.0% for the OCR late this year.

However, as of this week, the markets are now pricing in an OCR of 2.75% by October.

Tuesday of this week saw the release of the closely-watched (not least by the RBNZ) NZIER Quarterly Survey of Business Opinion (QSBO).

Eckhold said he had expected "a decent bounce" in activity indicators and an increase in pricing pressures in the survey.

"In actuality, the growth indicators still look fairly flat," he said. 

"We continue to expect the RBNZ to cut the OCR 25bps to 3.5% tomorrow. But the balance of risks lies clearly to the downside now," he said.    

"There are a wide range of outcomes for New Zealand interest and exchange rates from here. It’s likely the RBNZ will feel very keen to get the OCR to their estimate of neutral of 3% soon.

"They will likely indicate this intention in tomorrow’s statement. The meeting statement of record will also likely contain a discussion on the potential need to take the OCR below neutral at some point. But the MPC will likely not draw any conclusions on this point and leave that for discussion at the May Monetary Policy Statement," Eckhold said . 

He thought the RBNZ would not want to "scare the horses" with a large policy shift after being so definitive about a 25bps cut at the February Monetary Policy Statement.

"Triggering large further falls in interest rate expectations and the exchange rate, both of which have moved in the right direction, and raising speculation that the economic outlook is dramatically weaker would be undesirable," he said. 

"We suspect the big update will be in May where a wide range of outcomes look more feasible (the RBNZ will know the outcome of Budget 2025 by then also). Of course, the domestic and global outlook could look quite different by then. And the risk genuinely lies in both directions. NZ Inc could come off not too badly when all is said and done – but that doesn’t mean we will win outright either. The RBNZ will likely leave that assessment for May.  We will update our own OCR forecasts when we review our forecasts at the May Economic Overview. But there are clear downside risks to our current 3.25% OCR forecast trough."