Financial Markets Split on Reserve Bank’s Anticipated Rate Cut

Financial markets are currently divided over the potential size of a cut to the official cash rate (OCR) by the Reserve Bank of New Zealand, with a significant report on business confidence influencing expectations. Following the release of a discouraging business confidence survey, markets are pricing in a 44% chance of a 50 basis point cut when the Reserve Bank announces its decision at 14:00 tomorrow. Should this occur, the OCR would decrease to 2.5%.

While a 25 basis point cut, bringing the cash rate to 2.75%, remains the slight favorite, the current market stance is notable for its uncertainty, according to Kelly Eckhold, chief economist at Westpac. She remarked that it is unusual to see traders so evenly split in their predictions.

Mixed Forecasts from Financial Institutions

The divergence in expectations is also reflected in the forecasts provided by various financial institutions. While Westpac, ASB, Kiwibank, and market analyst Capital Economics are predicting a 50 basis point cut, other major players such as ANZ, BNZ, and the New Zealand Institute of Economic Research (NZIER) are still projecting a 25 basis point reduction.

Despite the recent downbeat findings of the Quarterly Survey of Business Opinion published by NZIER, no banks have adjusted their OCR forecasts thus far. However, the consensus is that the survey results have increased the likelihood of a larger rate cut. The survey revealed a decline in business confidence across nearly all sectors during the September quarter.

Future Implications of the Reserve Bank’s Decision

Economists anticipate that the Reserve Bank will likely cut the OCR again next month, when it releases its final monetary policy statement for the year. This meeting will be chaired by Christian Hawkesby, the acting governor, ahead of the expected arrival of new governor Anna Breman.

The forthcoming announcement is poised to have broader implications beyond immediate rate adjustments. The commentary accompanying the Reserve Bank’s decision could influence the expected terminal rate in the current interest-rate cycle. According to Eckhold, if the bank opts for a 50 basis point cut, it may lead to calculations suggesting a terminal rate as low as 2.25%. Conversely, a 25 basis point cut could indicate a terminal rate closer to 2.5%, depending on how the Reserve Bank characterizes the economic conditions.

Eckhold emphasized, “If they convey that conditions remain largely unchanged since August, it would suggest a 2.5% terminal rate. However, if they acknowledge weaker conditions and signal further considerations in the November meeting, it could lead to deliberations between a 25 or 50 basis point cut then.”

As the financial community awaits the Reserve Bank’s announcement, the split market sentiment underscores the complexities of the current economic landscape in New Zealand.