Those who like their Official Cash Rate (OCR) decisions complicated will enjoy this one.

There’s a number of points of interest and contention surrounding the latest review of the OCR (currently at 3.00%) by the Reserve Bank (RBNZ) on Wednesday, October 8.

For a start, there’s universal expectation of a cut. HOWEVER, what size of cut? 

The spanner in the works in the lead up to this OCR decision was the shock 0.9% GDP fall reported for the June quarter. 

Straight after that GDP release on September 18 all the talk was of the ‘need’ for a 50 basis-point cut. But now everyone’s calmed down a bit, the idea of a 25bps cut has regained favour. However, it’s definitely open for debate.

Inflation’s been spiking again, but the RBNZ seems comfortable enough that it will be a temporary spike, so inflationary threats are not likely to be a factor in the coming week’s decision.

Our economy is expected to have begun recovering again in the just-finished September quarter – but the question is whether that’s happening fast enough and whether faster and deeper OCR cuts can give the economic engine the required kickstart.

Dovish pivots and leadership changes

If we cast minds back to the last OCR decision on August 20, and the big ‘dovish pivot’ that accompanied it, two members of the RBNZ’s Monetary Policy Committee (MPC) that makes the OCR decisions, actually voted in favour then of a 50bps cut – although a 25bps cut was ultimately delivered. So, there are ‘doves’ in the mix who are certainly not against the idea of going ‘bigger’ in order to try to get faster stimulus to our economy.

At time of writing, financial markets were fully pricing in a 25bps cut for October 8, while there was a slightly better than one-in-three chance of a 50-pointer.

So room for debate.

Source: 123rf.com

Then there’s the additional complication surrounding the leadership of the RBNZ.

Christian Hawkesby, who was appointed temporary Governor after the sudden departure of Adrian Orr in March, applied for the job fulltime, but missed out to First Deputy Governor of Sweden’s central bank Anna Breman, who will take the reins on December 1; after the last of the OCR decisions for this year, but with plenty of time to get up to speed for the first OCR review of next year on February 18. 

Hawkesby will now preside over the coming week’s OCR review as part of the currently six-person MPC that makes the OCR call (he has the casting vote). Then Hawkesby will be involved in the final OCR decision for the year on November 26 before departing from the RBNZ altogether. So, that’s an interesting additional twist to proceedings.

In terms of the composition of the MPC, Westpac chief economist Kelly Eckhold, who is expecting a 50bps OCR cut to 2.5%, notes that the ‘dovish’ views on show in the August 20 decision “should hold even greater sway this meeting, helping to tip the balance on the MPC towards a 50bps cut”.

“We also note that the composition of the MPC has shifted since August. The most hawkish member, Dr Bob Buckle, has ended his term and there is a new member, Hayley Gourley, who may be happy to move with the consensus while getting familiar with the process,” Eckhold said.

“Similarly, we expect Governor Christian Hawkesby will give weight to the views of the members of the MPC who will be carrying on post November, since they will be the ones remaining to deal with the consequences of policy decisions taken now. We suspect this might increase the weight the most dovish MPC members carry this time.”

Some help might be needed with this decision

Such a background to the latest OCR review is all helping give flavour to what in any case was shaping up as a fascinating decision.

The RBNZ could need a tiebreaker to help it decide between a 25bps cut and a 50 pointer – and maybe they’ve got one.

The New Zealand Institute of Economic Research (NZIER) Quarterly Survey of Business Opinion (QSBO) has been around since 1961 and is much-watched, not least by the RBNZ, for its readings on things like the labour market and capacity pressures in the economy.

The latest QSBO will – as it happens – come out just one day before this OCR decision is made.

Now the RBNZ wouldn’t be expected to completely change its mind on direction because of the QSBO at such a late stage – but what if the Monetary Policy Committee is a bit torn between a 25 point cut and a 50 pointer? The NZIER survey might tip the balance.

Source: 123rf.com

And what might it be exactly that could tip the balance?

Well, if the survey suggests the economy is still struggling to get out of the hole it fell into in the June quarter, then a 50 point cut might be seen as just the thing.

Alternatively, if the NZIER’s survey points to improvements in the economy in the September quarter, then the RBNZ can hedge its bets with a 25 point cut. This would still leave the RBNZ with the final OCR review for the year in November at which another and maybe bigger cut can be contemplated if seen as necessary.

What might the NZIER survey say? Well, if it follows a similar path to the latest ANZ Business Outlook Survey, then there might be some signs of optimism. Firms in the ANZ survey are seeing better activity levels ahead.

However, balancing that is the fact that the most recent NZIER surveys have tended to be more downbeat than the ANZ surveys.

One reason cited for this is that the ANZ survey looks further ahead than the NZIER one does. The supporting logic for this reasoning is that firms are more optimistic about the medium term ahead, rather than the immediate future. It’s been a constant theme since the second half of 2024 that Kiwi businesses see a brighter future – but the present’s terrible. However, this trend has continued on much longer than expected, with the brighter future always seeming to move further away.

Applying strategy versus grabbing the firestarters

ANZ’s chief economist Sharon Zollner, who expects a 25bps cut to 2.75% in the coming week, thinks either a 25bps or a 50bps cut could be justified.

“Given that, we think the deciding factor will be strategy,” she said.

“A 25bp cut with plenty of dovish messaging around it reduces the risk of needing to change direction abruptly down the track, and it leaves maximum options open.”

Source: 123rf.com

ASB chief economist Nick Tuffley, thinks however, “it’s time the RBNZ got out a packet of Firestarters”.

“We argued quite forcefully in August last year that the RBNZ needed to start cutting sooner rather than later or it risked having to cut more aggressively – even then it ended up having to cut by 50bps three times in a row. The RBNZ paused this July out of an abundance of caution – it’s time now to catch up and pour some gasoline on the fire,” he said.

So, as I said earlier, plenty of room for debate on this one.

Personally, I would say cut 25bps in the coming week and then have a good look at the September quarter inflation figures out on October 20. These are likely to show the annual rate rising from 2.7% in the June quarter to somewhere near the top of the targeted 1% to 3% range. Then have a look at the labour market figures out on November 5. The RBNZ expects unemployment to rise from 5.2% in the June quarter to 5.3%. And then see how things are looking ahead of the final OCR call for the year on November 26 and adjust the OCR to suit.

Having said that, I most certainly will not be surprised if we see a 50-point cut in the coming week. Time to grab the popcorn again. The RBNZ might not have Orr anymore, but it can still shock.

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