The RBNZ Is In Focus This Week | The Kiwi Economy Requires Rate Relief, Quick

• Market participants were reminded of the strength of the US labour market following a surprisingly strong payrolls report. A follow up 50bps cut by the Fed looks less likely now.
• The RBNZ however, will most likely deliver a 50bp cut on Wednesday. Market traders have positioned for the outsized move and a 3% cash rate by August next year.
• Economic data suggests the need to return policy settings to neutral, quickly. Business confidence has markedly improved since the RBNZ’s policy pivot. But the current economic environment remains depressed and requires rate relief.

Here’s our take on current events

Financial market participants were reminded of the strength of the US economy last week. The September payrolls was shockingly strong. Over 250k jobs were added in the month, far exceeded forecasts of a 150k gain. The tally for the last two months was also revised higher by a combined 72k. The unemployment rate fell for the second straight month to 4.1%. And wage growth came above forecast at 4%yoy from 3.9%yoy. Taken alongside expectations of inflation lifting just 0.1% in September (data out this week), the US is truly shaping up to be a Goldilocks economy. Inflation is relatively benign and the labour market is robust. Markets and local commentators are re-thinking bets on the size of the Fed’s November rate cut. The data suggests removing another 50bp cut from the table and potentially replacing it with a pause. Indeed, traders are now pricing in less than a 25bp cut for the November meeting, a sharp pullback from the 33bps of cuts prior to the payrolls print. US treasury yields jumped in response, and the US Greenback (measured by the DXY) notched its largest weekly gain (~1.6%) in two years.

While a 50bp cut may be less likely in the US, the RBNZ will most likely deliver such a move on Wednesday (read our full preview here ). It’s the easiest thing to do. Market traders, and economists, have positioned for the outsized cut and a cash rate of 3% by August next year (see COTW below). 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 3.65% 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.

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

We are 250bps away from the RBNZ’s estimate of long term neutral. Neutral, a Goldilocks rate that’s “just right” and not too hot or cold, is estimated to be around 2.75% (with wide confidence bands). So in order to remove the restrictiveness of current policy settings, the RBNZ should accelerate their cuts. We’re arguing that the RBNZ should cut to 2.5%, the lighter side of neutral, with a hint of stimulus. And then there are the lags.

The lag between cutting the cash rate and the greatest impact on the economy is around 18 months, historically. That’s early in 2026. We believe the 18 month lag will be shorter in the current cycle. Because most households have shortened up their mortgage fixing. Most mortgages are fixed for less than a year, with the 6 month rate the most popular. That’s good news. But it is still a 6-to-12 month lag. Larger cuts today will give greater relief in 2025.

‘Survive til 25’ will become ‘thrive in 25’.

Given what we know, we would cut, in 50bp chunks. Chunky cuts would cement market pricing and allow banks to pass on the lower rates to customers. Savers have fair warning. The lower mortgage and business lending rates would help support confidence throughout the economy.

We took a quick poll of our followers on X (formerly Twitter), asking them what they think the RBNZ should do this week. and the results reflect the balance of savers versus borrowers. Most people (60%) want rate cuts. And the harder they cut, the better. But a third of respondents were savers and opting for no rate cuts. The poll results remind us that monetary policy is a blunt tool. There are winners and losers with any move the RBNZ delivers.

Chart of the Week: 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 41bps priced into the October decision – a bit over 80% chance of a 50bp cut to 4.75% (from 5.25%). And the November decision has another 47bps priced to 4.34%, so that’s most of a 100bp move to 4.25%. February is just as interesting with another 42bps 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.

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.

Special Topic: Business confidence improves without pricing intentions.

The NZIER’s quarterly survey of business opinion (QSBO), the best on the street, showed a marked improvement in business confidence. In the September quarter, only a (seasonally adjusted) net 5% of businesses expect economic conditions to deteriorate in the coming months – a much smaller proportion than the net 40% in the prior quarter. The meaningful improvement is an emphatic sigh of relief from Kiwi businesses. Policy settings have been too restrictive for too long. But now that the cutting cycle has begun, businesses are lifting their heads and looking to next year. To keep up confidence, the RBNZ now needs to deliver.

There is light at the end of the tunnel. But it’s still some distance away until we’re out of the shadows. According to Kiwi businesses, it is still a challenge to navigate the current economic environment. Experienced activity levels remain subdued. A net 31% of firms reported a decline in trading activity, an increase from a net 27% in the June quarter. There’s risk we do record a triple-trough recession. The data points to yet another quarter of the Kiwi economy running backwards. At the very least, below-trend growth remains the near-term outlook.

Spare capacity is quickly building, and there’s further disinflation to come. Risks are tilted toward a faster slowdown in inflation than initially expected.

See our full QSBO review: https://www.kiwibank.co.nz/business-banking/thrive-hq/kiwi-economics/commentary-insights/off-the-smell-of-an-oily-rag-business-confidence-improves-without-pricing-intentions/

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