The Reserve Bank says it will likely cut the Official Cash Rate to 3.75% in February, if economic data plays out as expected

Reserve Bank (RBNZ) Governor Adrian Orr says the Monetary Policy Committee expects to cut interest rates another 50 basis points in February, proving good things do come in threes. 

The Committee lowered the Official Cash Rate to 4.25% from 4.75% on Wednesday afternoon, following 50 and 25 point cuts in October and August, with another big cut still to come.

Orr told reporters the forecasts were “consistent” with another 50 point cut in February, and that the Committee had talked “explicitly, about moving early in the new year”. 

This would bring the OCR to 3.75% and just above the neutral range deemed neither stimulatory nor constraining to the economy, estimated to be anywhere between 2.5% and 3.5%, which the RBNZ is aiming to land in.

After February, the central bank does project the rate of cuts will slow with the OCR not falling to 3% until the end of 2026 — all conditional on economic forecasts playing out. 

ANZ chief economist Sharon Zollner said her team was still forecasting 25 basis point cuts in each of the next three meetings but the chance of another double cut had increased. 

“[The projection] is technically on the fence regarding whether February will bring a 25bp or 50bp cut, but the Governor made a comment at the press conference that made it clear that another 50bp is the default at this point,” she said in a note. 

Short-dated interest rates initially moved higher in reaction to the Monetary Policy Statement but fell back when Orr made the dovish comments. 

“The RBNZ has taken the OCR a big step closer to neutral, and left its options open from here,” Zollner said. 

Orr told reporters the Committee was aiming for the neutral interest rate and didn’t expect to need to stimulate the economy to prevent inflation from falling too far below the target range. 

“Headline CPI inflation can easily fall below the band, because it is so volatile relative to core inflation. The dramatic fall in import prices is the main reason we're at 2.2% at the moment”.

The Reserve Bank cannot rely just on low imported prices to keep inflation on target, particularly with trade wars looming, and still needs domestic prices to cool further. 

Zollner agreed, writing in a note that non-tradable inflation was still too high, at 4.9% in September, although the weak economy should mean it continues to recede.

“If the data comes in soft, then the RBNZ will clearly not hesitate to deliver another 50bp cut in February, but there’s a lot of water to flow under the bridge before then”.

Mortgage rates

Orr and Deputy Governor Karen Silk also had a warning for households looking to refix a mortgage: long-term retail rates are unlikely to fall as fast as the OCR. 

The RBNZ forecasts the average mortgage interest rate will decline from 6.4% to 5.8% while the benchmark rate drops from a peak of 5.5% to just above 3%.

This was partly because global bond yields, which banks rely on for long-term funding, have increased as investors price in a less efficient global market and higher interest rates.

Many New Zealanders have been opting for short-term mortgages on the expectation long-term rates will fall as the central bank cuts rates, despite those rates being more dependent on the global market than the OCR. 

“We're assuming people will start to move into longer dated mortgage fixes, but the thrill might not be as big as what it looks like on the OCR,” Orr said.