The Pressure For RBNZ Rate Cuts Is Mounting, As Rates Markets Collapse

• Kiwi wholesale interest rates have collapsed. Traders, many of them offshore, are placing massive bets on RBNZ easing, as early as August.
• We agree with market sentiment. Because we see the need for rates relief now, not later. If we were setting policy, we would have cut already. But for August, we’d cut 25bps, and signal 25bps at every meeting thereafter. And we’d highlight the potential use of 50bp moves, data dependent.
• At this stage, we don’t see the RBNZ buckling fast enough to do what’s needed (yet). Even though we think they should cut, we think it’s a step too far for the RBNZ. Following May’s massive misstep, August will be a complete about face, leaving many within the RBNZ with sprained ankles. We think they will lower all their forecasts and signal rate cuts by year end, rather than late 2025.

Here’s our take on current events

Grab the reins and hold on tight. That’s how the past week has felt as rates continue their race lower. After already falling a massive 47bps in the past 2 weeks, the pivotal 2-year swap rate rallied a further 15bp just last week. Hitting a low of 4.19% last week, it’s the lowest the 2-yr has traded in just under two years. And it’s well below its recent peaks of over 5.2%.

It comes as market pricing continues to run rampant in anticipation of RBNZ rate cuts. Market traders are now pricing 15bps of cuts in August. That’s a 60% chance of a rate cut in just a couple weeks’ time. And looking ahead, traders have priced in just over 75bps of cuts by November. That’s a whopping 3 cuts (see the COTW).

We get it. The Kiwi economy needs rate cuts. The data in recent weeks has significantly softened. A contraction in June quarter activity looks increasingly likely. But what the Kiwi economy needs, and what we think the RBNZ will do are two different stories right now. Too many cuts are priced in for 2024. Traders, as they often do, are jumping the gun.

If the RBNZ favours seeing official confirmation that inflation is back within it’s 1-3% target band, then November is the earliest kick-off date for rate cuts. Because we see this box being ticked by the next print released in mid-October. Our current call remains a 25bp cut in November. Risks however are strongly skewed to an earlier move. The weakness in the data as of late has definitely been playing on our minds. And no doubt the RBNZ’s too. We do think there is a case where weaker than expected data – whether that be the upcoming employment, GDP, or QSBO reports – could tip the scale towards a cut in October. Because such outturns should be confirmation in itself that inflation will fall below 3% in the September (current) quarter. August would be too early for the RBNZ, and quite the 180° move – to go from signalling a rate hike in May to cutting well ahead of expectations. The debate on timing will continue as more data comes to light. And more volatility is to come as the RBNZ likely under-delivers on (currently) over -priced market expectations.

In the meantime, we’ll be watching the US Fed, Bank of England, and Bank of Japan. All three central banks are expected to announce their latest policy decisions this week. And a hold (Fed), cut (BoE) and hike (BoJ) are on the cards. Gear up for another busy week ahead.

Chart of the Week: Calm the farm. Cuts are coming, thick and fast.

We find ourselves in an interesting situation. We have been banging the table for rates cuts. And we were (proud) outliers when calling for cuts to commence in November. That view is now consensus. And market traders are betting on more, a lot more. Market implied pricing for the RBNZ has collapsed.

In our charts of the week, we highlight the moves. Our first chart plots the pricing, per meeting, out to 2026. Traders have 14bps, or 55% chance of a 25bp, for 14th August MPS. For October’s MPR, there’s 37bps to 5.13%. And November is punchy, with a full 75bps to 4.75%. Remember, we were once outliers calling for 25bps in November. In February 2025, the market has a whopping 41bps for that meeting alone, taking the cash rate to 4.33%. We broadly agree with the pricing. This is what should happen. But will it? Probably not.

Rate cuts from August is a massive move from the RBNZ’s current OCR track. There’s a 3-day camel trek between market pricing, and RBNZ forecasts. One of them is wrong. We suspect the RBNZ will move much closer to the market, and deliver at least one cut this year. At the same time, market pricing will be pushed out again. Our second chart shows the gap between the market (blue line) and the RBNZ (orange line). Our forecasts are also illustrated in green. We think the market will prove to be a little aggressive near term, but still lacks the downside risk to the terminal rate. The RBNZ’s terminal rate should be close to their forecast neutral rate of 2.75%. The market has 3.2%. And we see a move slightly below neutral to 2.5%. Either way, the magnitude of cuts to come, is big. And that’s what businesses and households to focus on.

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