OCR drop signals further interest rate cuts to come

Yesterday's announcement of an OCR drop 50bps to 3.75% signals further easing in April and May, says Westpac. 

As widely anticipated, the Reserve Bank of New Zealand cut the OCR, signalling a high chance of 2-3 further cuts in 2025, including 25bp cuts at the next two monthly meetings, says Westpac Chief Economist Kelly Eckhold. "The RBNZ’s tone remains dovish albeit without any obvious intent to do another 50bp cut in the near term. Our OCR forecast remains unchanged. We see two further 25bp cuts in April and May and the end of the cycle at 3.25%."

The Monetary Policy Committee remains confident that inflation will remain well-contained, according to Eckhold, "Even though the headline CPI will temporarily rise to 2.7% in the September quarter of this year. These forecasts are exactly in line with Westpac’s forecasts.

"The RBNZ has not significantly adjusted its short-term growth forecasts and sees recent indicators as broadly consistent with the expected return to growth from the December 2024 quarter. The RBNZ has, like us, not taken much from the large falls in GDP in mid-2024. There is a modest upgrade in their assessment of excess capacity in the economy – but it's very much at the margin. The forecast downturn in the unemployment rate occurs a quarter later than projected in November."

Eckhold outlined the bank's predictions. "We see the RBNZ cutting the OCR by 25bp increments at the April and May meetings, leaving the OCR at 3.25%. We think the RBNZ will pause at this point as by then there will be tangible signs of a return to trend growth, while inflation will still be in the top half of the 1-3% target range. This combination may test the MPC’s confidence in how anchored inflation is by then."

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