‘Game on!’: Economists get more than they expect from the Reserve Bank as it makes a 'bold' move projecting the Official Cash Rate to go as low as 2.5%

The Reserve Bank has dramatically changed its tune - shifting from “no change” at July’s Monetary Policy Review to throwing in the potential for a 50 basis point cut, economists say.

While economists had anticipated the Reserve Bank (RBNZ) to make a cut to the Official Cash Rate (OCR), there is surprise at how far things have swung around.

On Wednesday the OCR was cut to 3% from 3.25% with two members of the RBNZ’s six member Monetary Policy Committee actually voting for a 50-point OCR cut.

Now, an OCR low point of 2.5% is being seen as a real possibility in the not too distant future.

“The central bank we saw today was one almost completely different from the one we saw in May,” Kiwibank economists say.

‘Back on the warpath’

Not only did the RBNZ cut its OCR to 3% - it gave a strong indication in its Monetary Policy Statement there is even more to come, BNZ’s head of research Stephen Toplis says.

“We were strongly of the view that a further reduction to 2.75% would be signalled. What we didn’t expect was the strength in conviction expressed by the Monetary Policy Committee.”

Toplis says the fact two of the six members voted for a 50-point cut came as a real surprise.

“The RBNZ is back on the warpath.” 

“In our opinion, the RBNZ did the 'right' thing today. There are the first signs of green shoots in the economy but they need watering to sustain any growth there may be,” Toplis says. 

“The RBNZ has done this and thrown in a bit of fertilizer. How much more help is needed will be driven by the responsiveness of the economy to what has been announced so far.” 

Given the RBNZ’s strength in its convictions, BNZ is following suit with its OCR projections, Toplis says.

“We thus reduce our projected low to 2.5% (from 2.75%) taking us back to the forecast bottom we had back in September 2023.”

'Elevated levels of uncertainty'

Infometrics chief forecaster and director Gareth Kiernan says how far things have swung around possibly reflects “elevated levels of uncertainty hanging over the economy at the moment”.

“Based on the balance of risks revealed by today’s vote, Infometrics now forecasts two further cuts to the OCR, in both October and November, taking the OCR to a low of 2.5%.”

"If economic growth has started to accelerate more consistently before the end of the year, but the Reserve Bank is still cutting the OCR, there is a sizeable risk that these late-cycle rate cuts overstimulate the economy by the end of 2026," Kiernan says.

"The Bank has at times displayed limited ability to be forward looking when setting monetary policy over recent years, and it again risks setting interest rates based too much on current conditions."

"As a result, if the OCR goes to 2.5% by the end of this year, we caution that the Bank is likely to need to be lifting interest rates again in late 2026 to re-establish interest rates at a more 'normal' or neutral level over the medium term," Kiernan says.

ANZ chief economist Sharon Zollner says the RBNZ delivered more than expected on Wednesday.

While a 25 basis point cut was universally expected, “the forecasts and the tone of the discussion were much more dovish than we - or the market - had anticipated”, Zollner says.

“We thought this week would be too early for the RBNZ to pivot to our view of things, but that’s precisely what happened. Their forecast for the OCR trough [at] 2.55% is now effectively the same as our own forecast.”

Zollner says the RBNZ has brought about “a meaningful easing in monetary conditions that will help shore up the economic recovery."

More dovish than expected

ASB senior economist Mark Smith says the tone of the policy assessment was more dovish than expected.

“With few catalysts that would kick start a domestic expansion and with fiscal buffers needing to be restored, more of the onus of policy support has fallen on the OCR,” Smith says.

Smith says they expect a further cut of 50 basis points before the year ends and a 2.5% OCR as the RBNZ “frontloads policy stimulus.”

“OCR moves remain conditional on the highly uncertain economic outlook, with both upside and downside risks.”

'Forecasting, praying and rain dancing'

Kiwibank economists say the RBNZ is back in the game.

With a signal towards an OCR of 2.5%, Kiwibank economists say: “It was an out-of-consensus move, and a bold one for the RBNZ.”

“We have been forecasting, praying and rain dancing for a 2.5% since late 2023. We still are, with another two 25 basis points cuts to be delivered at each of the RBNZ’s remaining meeting this year.”

BNZ’s Toplis says one thing is for sure: “Prime Minister Christopher Luxon will not be making any reference to a ‘too late Hawkesby!’”

And Toplis is right.

Speaking to media on Wednesday afternoon, Prime Minister Christopher Luxon and Finance Minister Nicola Willis welcomed the OCR cut.

“I think if you’re a homeowner in New Zealand that means you’re going to have more money in your back pocket and of course that’s money you can spend on the economy,” Luxon says.

“Likewise if you’re a business owner that means you can borrow to invest to grow your company and continue employing people.”

Willis says; “the Official Cash Rate decision today forecasts more reductions than had previously been forecast by the Reserve Bank, which will have the effect of lower interest rates in the future”.

“That creates the conditions in which businesses can create jobs and growth and we know that’s what New Zealand households want to see.”

Labour Party finance spokesperson Barbara Edmonds told 1News while the OCR cut is good news for homeowners, “it clearly shows the Reserve Bank is doing the heavy lifting, instead of the Government”.