Monetary policy review

Another 50-point cut, as Bank keeps its options open

27 Nov 2024

Gareth Kiernan

Our take on the latest Monetary policy review (Wed 27 Nov 2024)

OCR cut 50bp to 4.25%

Non-tradable inflation forecast to ease more slowly

Either a 25 or 50bp cut looks possible in February

The key numbers...

The Reserve Bank met market expectations with a cut of 50 basis points to the official cash rate (OCR) today, taking it down to 4.25%.
The Bank’s accompanying statement communicated a higher level of uncertainty about aspects of the economic and inflationary outlook than previously. These risks included the persistence of some components of domestic inflation, the timing and speed of the economy’s recovery, and geopolitical risks.
The Bank’s OCR projections, which this year have been of limited use in predicting future monetary policy decisions by the Bank anyway, are as much as 55 basis points lower during 2025 than they were in August’s Monetary Policy Statement. However, the vast bulk of that shift reflects the two 50-point cuts that have already occurred (despite the previous track pointing towards 25-point cuts) rather than any accelerated pace of easing in monetary conditions next year.
The Reserve Bank has made substantial downward revisions to its estimates of future potential growth, of 0.6-0.8 percentage points per year. It now forecasts potential growth of as little as 1.5%pa in the March 2026 year, with slowing net migration and weak productivity growth having a detrimental effect on the economy’s ability to expand.
Currently at 4.9%pa, the Bank expects non-tradable inflation to ease to 3.4%pa by September next year. This is a sizable upward revision from its previous forecast of 2.9%pa, and reflects lingering pockets of pressure across areas such as insurance, local government rates and other government charges, and electricity. For now, however, the Bank appears to have taken a sanguine view about these factors, instead highlighting that domestic “wage and price setting behaviours are becoming consistent with inflation remaining near the target midpoint.”

Moving closer towards market expectations

OCR projections, RBNZ and swap pricing, quarterly averages

...and our reaction

The Reserve Bank’s OCR track implies about a 65% chance of a 50-point cut at next February’s Monetary Policy Statement. However, these forecasts should be treated with extreme caution given the lack of faith the Reserve Bank has put in their own forecasts here previously, and there is a lot of time and data to come before the 19 February review.
The Bank still sees the OCR bottoming out at around 3% over the medium term, despite slower potential growth for the economy. There appears to be a degree of inconsistency between the Bank’s assessment of slower potential growth and greater persistence in domestic price pressures, at the same time as they have opted to cut interest rates faster than previously indicated.
The Bank noted that “feedback from business visits [and] high frequency indicators suggest that the economy has stabilised in recent months.” Infometrics discussions with businesses in the last few weeks similarly indicate an improvement in demand conditions sooner than we had expected, so we see potential for economic results to surprise the Bank on the upside before its next meeting in February.
Based on the Governor’s comments at the post-MPS media conference, we believe a 50-point cut to the OCR is the most likely outcome at February’s review, although based on the Statement itself and RBNZ’s economic projections, a 25-point cut would be most appropriate. The long summer break will provide considerably more data to assess before then, so the decision remains highly data-dependant.
In the meantime, financial markets could latch onto the Bank’s latest forecast track and price in more cuts to the OCR than they had been. Such a shift could bring shorter-term fixed mortgage rates down further before Christmas.

Latest updates

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Monetary policy review

Another 50-point cut, as Bank keeps its options open

The key numbers...

Moving closer towards market expectations

...and our reaction

Latest updates

OCR up for first time in three years, as expected

Split decision keeps OCR at 2.25% for now

Reserve Bank holds at 2.25%, but watches vigilantly

OCR on hold, but set to lift slightly quicker