Reserve Bank virtually compelled to cut interest rates again in the coming week, but it's likely to want to keep its options completely open for the start of next year

Of all the reasons why the Reserve Bank (RBNZ) WILL cut the Official Cash Rate in the coming week, the question or whether a cut is really needed or not is actually one of the lesser considerations.

That may seem odd. But not really when we look at the various issues around the forthcoming review, on Wednesday, November 26.

The fact is, the RBNZ's Monetary Policy Committee (MPC) when cutting the OCR by 50 basis points in the review last month, clearly signposted a further cut this month by saying: "The Committee remains open to further reductions in the OCR as required for inflation to settle sustainably near the 2 percent target mid-point in the medium term."

Additionally, the review in the coming week is the last one till February 18, 2026, so the RBNZ ain't going to wait all that time for another 'as required' cut. Nearly three months is a long time to leave people 'hanging' in terms of expectations.

A clear path for the new Governor

Also, this upcoming review is the last one under temporarily appointed Governor Christian Hawkesby who will then depart the bank, making way for new Governor Anna Breman, who starts on December 1. Presumably, Hawkesby will want to leave a clear path for Breman when she oversees her first OCR review in February. So, a cut it will be.

And finally, and by no means least, the markets must get what they expect. A 25 basis point cut, taking the OCR to 2.25% is fully priced in to wholesale interest rates. That effectively locks the RBNZ in to making a cut. 

Well, sure, it doesn't have to, it can do what it wants. But when the financial markets have fully priced in one scenario and another scenario unfolds, then ructions follow. And neither Hawkesby nor the rest of the MPC will want such an outcome ahead of the change over in Governors. 

So, a cut it will be, and with, as I say at the top, the whole question of whether a cut is needed or not being relegated in importance behind those other factors.

Being as it may then, is another cut needed? And what next?

The hoped for economic recovery this year has struggled to get started, culminating in a shocking 0.9% fall in GDP for the June quarter. While that 0.9% figure appears to have overstated the case substantially, there was no doubt a mid-year stumble. The RBNZ's 50 point OCR cut last month was clearly a "cheer up" message to the masses.

Let's have a look at what has happened since the last OCR review on October 8.

We've had two 'biggies' in terms of economic announcements.

The Consumers Price Index for the September quarter, released on October 20, showed annual inflation at 3.0% (and if we want to split hairs, very nearly 3.1%). Now, obviously, that's at the top of the 1% to 3% target range. However, in its last Monetary Policy Statement (MPS) issued in August, the RBNZ forecast 3% annual inflation for the September quarter. So, it was not surprised.

Likewise, labour market figures released on November 5 showed unemployment blipping up from 5.2% to 5.3% - but again no surprise for the RBNZ, which had picked 5.3%.

Recent comments from the RBNZ have suggested the central bank is more concerned about 'spare capacity' in the economy than inflation - as it thinks the currently simmering inflation will cool. And spare capacity in the economy will do that.

Moving on to some of the more timely 'high frequency' data, Statistics NZ's latest monthly (for October) Selected Price Indexes figures, comprising items that make up around 45% of the Consumers Price Index, showed food prices still elevated, but other things such as rents subdued. It's early days for the December quarter, but economists reckon we are on track to see CPI for this quarter falling to annual inflation rate of around 2.8%, which would be higher than the RBNZ's 2.7% pick - but moving in the right direction, and crucially nestled back into the 1%-3% target range again.

Adding some confidence into the mix

In terms of the engine room of the economy, there signs of improvement, but it's a slow grind. Manufacturing is now expanding again, slowly, while things are also getting better in the services sector, but it's still in contraction.

The latest electronic card spending figures show that Kiwis are still reluctant to get out and spend at the moment.

House sales picked up last month but prices are still subdued.

Confidence still appears to be the missing ingredient in our economy, so, to that extent another 25 basis-points fall in the OCR in the coming week can help to provide a bit more cheer before Christmas and it likely might push prevailing mortgage rates closer to the 4.25% level that I (finger in the air) bet with myself early this year they would end 2025 at.

But beyond that, where do we go from here?

This coming week's OCR review will be accompanied by a new MPS and, as ever, the key point of interest will be the RBNZ's forecasts for the future level of the OCR.

These forecasts always take a bit of untangling because the OCR level is given as a quarterly estimate (whereas the OCR's actually reviewed seven times a year). The most recent forecasts give an estimated low point for the OCR of 2.55% in the March quarter 2026. 

So, that's already well out of date, given that the OCR is currently at 2.50% and expected to drop to 2.25% in the coming week. 

For various of the reasons discussed higher up in this article, the RBNZ won't want to commit itself to any specific course of action next year. 

With the economy still in a very fragile state and inflation still simmering, the RBNZ will want to keep its options as open as possible.

If the new set of forecasts was to, for example, give an estimate of 2.15% for the OCR in the March quarter' this would suggest the possibility of a further cut (if needed) without locking the RBNZ into making one. 

At the moment financial markets, while fully pricing in a 25 point cut in the coming week, are pricing in a slightly better than one-in-three chance of a follow-up cut at the next review on February 18. The RBNZ would probably be fairly happy with such pricing and wouldn't want to make any forecasts that change that either way.

The ideal scenario for the RBNZ would be to provide itself a blank canvas for that February review.

In the meantime there will be all sorts of data goodies to digest including September quarter GDP figures out on December 18 (economists expect a rise of maybe 0.5%), inflation figures on January 23, unemployment figures on February 4, and the usual range of high frequency data too.

We will therefore have a much clearer picture by February 18 of whether the combined stimulus of the OCR cuts is finally getting a long awaited economic resurrection under way.

If 2.25% does look like it will indeed be the low point for the OCR in this cycle, then thoughts will quickly shift to when it may start moving up again. But that's definitely one for 2026.

*This article was first published in our email for paying subscribers early on Friday morning. See here for more details and how to subscribe.