The RBNZ Will Most Likely Cut 50bps Next Week, And Again In November. It’s The Easiest Thing To Do

• When the Fed delivered a 50bp cut, the question became: “can the RBNZ do the same?” And we said “Why not? They should deliver a 50bp cut in October and November… the economy needs it”. Listen to our podcast here: Fed leapfrogs the RBNZ.
• And now that a 50bp cut is consensus amongst economists and market traders, it’s actually harder NOT to deliver a 50bp cut. A 50bp cut next week, with a signal of another in November, would only appease traders and keep wholesale rates where they are.
• If the RBNZ is serious about reducing the restrictiveness (not providing stimulus) of monetary policy, the market has opened them up for larger moves. Overly restrictive monetary policy has inflicted much pain and tamed the inflation beast. Households and businesses are struggling. It’s been two years of recession. Interest rate relief is required, now. And long policy lags must be taken into account.

The path of least regret, already laid out.

Market traders, and economists, have positioned for chunky 50bp rate cuts. The wholesale rates market (measured by Overnight Index Swaps, OIS) has 44bps priced into the October decision – roughly 90% chance of a 50bp cut to 4.75% (from 5.25%). And the November decision has another 48bps priced to 4.33%, so that’s most of a 100bp move to 4.25%. February is just as interesting with another 45bps priced. So traders are pricing in “odds on” bets of 50bp cuts. The cash rate is priced to hit 3% by August next year, with a terminal rate around 2.5%, in line with our forecast.

The aggressive rate path has pushed all wholesale rates lower. The 2-year swap rate (used by banks to price 2-year fixed mortgage rates) has collapsed from a 4.6-to-5.2% range, to 3.55% at time of writing. If the RBNZ cuts as we suggest, and signal more to come, we’d expect the recent rampant rally in rates to hold. Anything less than 50bps in October and November would cause a massive move, in the wrong direction.

We hear a lot about the “path of least regret” from the RBNZ. And that path has been laid out beautifully. We think the path of much regret would be to stick with the OCR track laid out in the RBNZ’s August forecast – which is 25bp per meeting.

And let’s be clear, cutting in 50bps provides relief, not stimulus.

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