Done But Not Dusted. Rate Cuts Will Continue In 2025.

• Three cuts, two 50bps, and one cash rate at 4.25%. In the final meeting for the year, the RBNZ delivered on expectation and cut the OCR to a 2-year low. The build-up of excess capacity has strengthened the RBNZ’s confidence and comfort around the inflation outlook.
• The OCR track shows more frontloaded cuts, with another 50bp in February as most likely. However, the new track is flatter than we expected. Like in May, the RBNZ’s bias may be moving in the wrong direction.
• StatsNZ recently announced changes to how they calculate economic growth. Changes that are likely to ‘technically revise’ away the depth of recession we’ve been in. But revisions or not, we’re still doing it tough. Our COTW is a reminder of the pain out there.

Here’s our take on current events

Last week, the RBNZ took the stage for the final time this year and delivered on expectations. The cash rate was cut for a third time, down 50bps to 4.25%. However, the path thereafter is higher than we expected. We had forecast a continuation of cuts to 3%, followed by a pause, and then a slightly stimulatory boost to 2.5%. Well now we just expect the RBNZ to stop at neutral (3%), where policy is neither stimulating nor restraining the economy. The RBNZ is more comfortable than we are with the economic scarring inflicted and likely recovery. We think the RBNZ’s bias may be moving in the wrong direction, as they did in May. They’re too hawkish. Time will tell. And we have a lot of time until their next decision in February.

For market players, there was no mention or consideration of a 75bp cut, or a 25bp cut in the record of the meeting… So, all the hype around 75bps fell on deaf RBNZ ears.

The argument for a 75bp move was fair. There’s a long wait for the next OCR decision in February. The RBNZ like their summer break, seasonally adjusted. So last week’s decision was effectively a double decision, given the gap. But more importantly, we’re still a long way away from neutral. At 4.25%, rates are restrictive, and we’re deep in recession. We’re at least 75bps off the more pessimistic estimate of neutral at 3.5%, and 175bps off the lower estimate of 2.50%. No one sees neutral at 4% or above.

The argument for a 25bp move was premature. A 25bp move wasn’t discussed. And while the RBNZ have been very vocal about another 50 in February, a 25 may get more airtime then. We think the RBNZ will scale down to 25bp moves as the size of choice later in 2025, as they slow their approach to neutral.

The RBNZ’s modelled estimate of the neutral rate was revised up, again. The long-term neutral rate was lifted from 2.75% to 2.9%. That’s significant, and points to a higher terminal rate. Accordingly, we have adjusted our terminal rate higher. We still need more cuts. And we need the cash rate below 4% asap. We expect a third 50bp move in February… But we’ve lifted our endpoint to 3%, up from a slightly accommodative 2.5% on the back of the RBNZ's tweaks. But we note that the RBNZ may be too hawkish, again (as they were in May).

Charts of the Week: A reminder that we’re still in recession.

You may have heard last week that Stats NZ announced some changes and revisions to their GDP calculations. As such it seems like much of the recession we’ve been in over the last couple of years is going to be ‘technically’ revised away. Initial estimations show real GDP growth is likely to be revised up by 0.8%pts in the year to March 2023. And in the year to March 2024, economic activity is expected to be revised a solid 1.1%pts up. Overall implying that the Kiwi economy did not shrink by as much as previously reported. We’ll find out more in a fortnight (Q3 GDP data release).

But regardless of the revisions, the Kiwi economy is still in a recessionary environment. And there’s plenty of recent data showing the ongoing pain and weakness out there. Take KiwiSaver withdrawals for example. “Hardship withdrawals” have spiked from $10 million is January 2023, to $38 million in October. These withdrawals are not easy to make. “To withdraw savings, you will need to provide evidence you are suffering significant financial hardship.” That’s significant financial hardship as a direct impact of restrictive monetary policy settings.

Then there’s the ongoing weakness in consumer spending. Last week, StatsNZ released the latest data in retail spending which showed another quarter of declines across the industry. The September quarter marked the eighth annual decline in retail sales with sales contracting 2.6% over the year. That’s two years of decline! And lines up perfectly with the two years of recession we’ve been in. Consumer confidence is starting to pick up now with the rate cutting cycle underway. But it will take time to see this translate through to sales as households recuperate their savings.

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