Calls grow louder for Reserve Bank to cut rates by 50pts

Newsroom

27-05-2025

As another Budget Day is consigned to the history books, the focus again turns to the Reserve Bank's latest assessment on the state of the economy.
The central bank also faces an opportunity of its own: to match the Government's so-called 'growth' rhetoric with a super-charged rate cut of its own. Who wouldn't want to see a rate cut surprise this Wednesday?
More than a few business leaders will no doubt have spent the weekend turning over in the minds how they might take advantage of the Government's new 'Investment Boost' scheme incentivising business with generous tax rebates on capital purchases.
It was a welcome bright spot on an otherwise dismal budget outlook that reinforced how little room the Government has to manoeuvre currently.
Not that the scheme will move the needle on the economy by that much. Finance Minister Nicola Willis estimates a 1 percent boost at best. But it's a start.
If there was one very obvious theme emerging from Thursday's budget it had to be the fact that future government surpluses now largely appear to be a thing of the past and any that are forecast five years hence will barely be worth the paper they're written on.
Political historians will also have noted the rich irony that it was former National Party leader Robert Muldoon who, as opposition leader in the run up to the 1975 election, accused then Prime Minister Bill Rowling of adopting a 'borrow and hope' mentality when it came to Labour's plans for the economy.
'I'm frustrated . . . at the lack of understanding of what Kiwi businesses were going through out there. The time for easing was the beginning of 2024, not the end of 2024. We're a bellwether and we've had more clients go into receivership or liquidation in the last 12 months than in any of the other cycles.' Steve Bonnici, Urgent Couriers
Now it seems both sides of politics are united in their belief that we just have to keep on borrowing and hoping that things will improve – eventually – as the numbers continue to grow exponentially and become ever more eye-watering.
Gross government debt is now projected to increase by $73 billion by 2029 according to Treasury's latest forecasts and servicing that debt will now cost an additional $3.6b more over the next four years.
Bond yields will rise
But what seems to be unrealistically optimistic in the forecasts is the assumption that the yield on New Zealand 10-year government bonds will ease to 4.3 percent next month and remain relatively unchanged at that rate for the next four years. As of Friday, the rate stood at 4.7 percent.
Just take a look at US Treasury yields last week to get a taste of what might be around the corner. The US 20-year bond soared past 5 percent for the first time since the 2007/08 Global Financial Crisis. Investors are demanding a higher return for the risk they are taking on. This is quickly becoming a universal trend on bond markets globally.
Which brings us to this week's official cash rate decision by the Reserve Bank.
The central bank's last decision on April 9, just a week after US President Donald Trump's Liberation Day tariff announcements had financial markets in a tailspin and just a few weeks after the shock departure of former Reserve Bank governor Adrian Orr, leaves his replacement Christian Hawkesby with an opportunity to now stamp his own mark on monetary policy.
It's time to return to the double 50 point cuts says Kiwibank chief economist Jarrod Kerr.
'The economic developments since the Reserve Bank's last monetary policy statement have deteriorated here, and especially offshore. The justification of a more 'go for growth' focused Reserve Bank has strengthened. Hawkesby (hopefully Dovesby) could easily deliver a 50 basis point move this Wednesday and signal another 50 point move to 2.5 percent to come. That would set policy about right for a recovery.'
Let's stop delaying the inevitable with these overly cautious 25 basis point moves, Kerr says.
'A more decisive Reserve Bank would be viewed positively by everyone, particularly given the difficulty the Government had in balancing its budget this year. Next year's is likely to be even more difficult,' he argues.
'If, however, Hawkesby decides to play the 'nightwatchman', then we may just get a 25 basis point cut and little else. That's precisely what we don't need and we'd argue it would show an Reserve Bank out of touch with our economic reality.'
In his official cash rate preview, Kerr also quotes a recent guest on Kiwibank's weekly podcast to illustrate his point.
'We're a bellwether'
Urgent Couriers' managing director Steve Bonnici said he feel the ups and downs of the economic cycle before most.
When asked about the current cycle and the Reserve Bank monetary policy actions, Bonnici said: 'I'm frustrated . . . at the lack of understanding of what Kiwi businesses were going through out there. The time for easing was the beginning of 2024, not the end of 2024. We're a bellwether and we've had more clients go into receivership or liquidation in the last 12 months than in any of the other cycles (back to the 1980s).'
Kerr said Bonnici's comments are reflective of what he's hearing from the vast majority of Kiwi businesses who continue to struggle.
As to what he expects the Reserve Bank will do on Wednesday, versus what he would like them to do, Kerr says a 25 point cut accompanied by a lowering of the official cash rate track would be a likely compromise.
'Currently, most economists sit between a low of 2.5 percent (Kiwibank) and a high of 3 percent. This scenario will push most economist forecasts below 3 percent to a 2.5-2.75 percent range.
' The wholesale rate markets currently imply an official cash rate terminal rate of 2.85-2.9 percent. We should see a (very) slight reduction in rates, supporting current mortgage rates. The variable and 6 month rates would move lower, but the 1 year and beyond wouldn't move much at all. However, that's not what we need either.'
Kerr says the Reserve Bank's current trajectory is unlikely, in his view.
'Get to neutral, and get the economy moving. Ultimately, it's better to act swiftly and decisively to get lower rates feeding through faster. More meaningful cuts are required here and now.'
Now we wait until Wednesday for the official verdict.
Coming up this week
Monday
Residential Mortgage Lending (April) – RBNZ
Turners Automotive – Full year result
Kiwi Property – Full year result
E-Road – Full year result
Tuesday
NZ Institute of Economic Research Quarterly Predictions
Asset Plus – Full year result
Wednesday
RBNZ Monetary Policy Statement
Business Count indicators – Stats NZ
Employment indicators – Stats NZ
F&P Healthcare – Full year result
Rakon – Full year result
Infratil – Full year result
Smartpay Holdings – Full year result
Thursday
ANZ Business Outlook
Mainfreight – Full year result
Ryman Healthcare – Full year result
Goodman Property Trust – Full year result
Trade Window Holdings – Full year result
Marsden Maritime Marine – Special Meeting
Friday