Reserve Bank likely to cut key interest rate by 50bp next week

The Reserve Bank is widely expected to cut the benchmark interest rate by a punchy 50 basis points next week as it seeks to ease pressure in a weak economy.
All the major local banks, including ANZ, ASB, Westpac, BNZ and Kiwibank, confirmed this week that they expect the Reserve Bank to reduce the Official Cash Rate by 50bp to 4.25 percent at its Monetary Policy Statement next Wednesday.
The Reserve Bank Te Pūtea Matua was among the first in developed economies to lift interest rates from the record lows of the pandemic in August 2021. It then embarked on its fastest pace of tightening since pioneering inflation targeting more than 30 years ago, increasing the rate by 525bp to 5.5 percent to stomp out inflation.
But with inflation now coming back into the Reserve Bank’s 1 to 3 percent target range, interest rates are coming down again.
“The RBNZ has kept the Kiwi economy in a chokehold over the past couple of years to kill inflation. But now, the inflation beast has been slayed! And we need the RBNZ to loosen its grip fast – before doing any more unnecessary damage to the economy,” Kiwibank economists said in a note this week.
The Reserve Bank opted for a cautious start to easing, cutting by a quarter point to 5.25 percent in August. It stepped up the pace last month with a 50bp cut, and is expected to repeat that next week amid rising unemployment and weak economic activity.
To be sure, there is some debate about whether the central bank could be more cautious with a 25bp cut, or more aggressive with a 75bp cut.
In its preview of the decision this week, BNZ said they were all options that reasonable people could present sound arguments for.
“We are at that strange stage of the economic cycle where green shoots are prevalent but those shoots are appearing amongst the death throes of the past season’s crop,” said BNZ head of research Stephen Toplis.
“Forward indicators for the economy are growing in strength but today’s news is far from optimistic, lags in the system will ensure there are many more people yet to lose their jobs, and there is substantial ongoing risk of increased business failures.”
That made it a challenging time for the central bank to evaluate how much easing was required, he said. 
Arguments for a smaller cut included that the election of Donald Trump in the US was inflationary, and that key inflation and labour market data are close to the Reserve Bank’s expectations, suggesting a more moderate approach, he said.
The case for a 75bp cut revolved around the fact there is little evidence the economy is yet gaining much traction from the easing we have seen so far, he said.
BNZ noted the cash rate was currently above neutral, making a strong justification for a greater-than-25-point move. But equally we weren’t in a GFC or pandemic that required a 75 point move.
“The argument for a 75 point cut is bolstered by the fact that there is a long wait until the next meeting in February, a wait that many think the RBNZ can’t afford,” Toplis said. 
“We get the sentiment but we simply do not think the necessary excesses are in place to warrant such an aggressive move at this juncture.”
He noted the central bank’s discussion in October was around whether it should cut 25 or 50, with little weight given to a 75 point move.
BNZ concluded the argument for a 25bp point cut was “marginally stronger” than that for 75.
ANZ, meanwhile, thought the balance was tilted slightly towards a bigger cut rather than a smaller cut.
“A 50bp cut is clearly the path of least resistance, but if there is going to be a surprise, given the RBNZ’s confidence regarding the inflation outlook and the unusually long gap until the next meeting, a larger cut does seem likelier than a smaller one,” ANZ said in its preview note on Tuesday.
Ahead of the decision, markets are pricing in 53bp of cuts – an acknowledgement that they see 75 basis points as more likely than 25bp, ANZ noted. 
“We’d expect them to say that they considered cutting both 25bp and 75bp, and that future moves will be data dependent,” ANZ said. 
“The market will pay close attention to whether the committee considered 75bp (or 25bp), and that’ll be instructive for where market expectations for February and beyond sit after the meeting. If a 75bp cut is discussed but not delivered, that’d likely keep markets open to the idea of February being another 50-pointer, rather than just a 25bp cut.”