25 And Not Done. The RBNZ Has More Work To Do. More Cuts Are Required.

Scoop

23-05-2025

Press Release – Kiwi Economics
The weakness in the economy is clear and demands more attention and less restriction. With all the risks offshore, think Trumpian tariffs, and the pain still felt onshore, theres a good argument to be made for taking policy into stimulatory territory …
Next week's decision, with updated forecasts, is important. There's no doubt that the Kiwi economy needs support. There's no doubt the RBNZ should be aiming to stimulate, not restrict, the economy. It's just an argument around how much support is needed.
The RBNZ has signalled a 25bp cut to 3.25% next week. If it was up to us, we would deliver a 50bp cut to 3%, a level broadly considered neutral, not even stimulatory. But it's not just about the cut, it's also about the trajectory. And we're focussed on their next move(s). They're saying just one more move (25bps) to 3.0% after next week. We're saying get to 2.5%. We're stubborn, and we're hoping they're flexible. They had to be very flexible last year.
The weakness in the economy is clear and demands more attention and less restriction. With all the risks offshore, think Trumpian tariffs, and the pain still felt onshore, there's a good argument to be made for taking policy into stimulatory territory asap.
Next week's decision, with updated forecasts, sets the scene for the next 3 months, at least from the RBNZ's perspective. Adrian Orr has left the RBNZ and Christian Hawkesby is in charge. Next week's decision is a chance to differentiate from the Orr era. The economic developments since the RBNZ's last MPS have deteriorated here, and especially offshore. The justification of a more 'go for growth' focussed RBNZ has strengthened. Hawkesby (hopefully Dovesby) could easily deliver a 50bp move next week and signal another 50bps to 2.5% to come. That would set policy about right for a recovery. And it's not mucking around with 25bps moves, delaying the inevitable. A more decisive RBNZ would be viewed positively across the road (Terrace), given the difficulty the Government had in balancing yesterday's budget. 2026 will be just as hard.
If, however, Hawkesby decides to play the nightwatchman, then we may just get a 25bp cut and little else. That's precisely what we don't need. And we'd argue it would show an RBNZ out of touch with our economic reality.
We highly recommend watching our latest podcast where we speak to Urgent Couriers's Managing Director Steve Bonnici. Urgent Couriers feel the ups and downs of the economic cycle before most.
When asked about the current cycle and monetary policy actions of the RBNZ, Steve said: 'I'm frustrated (by the RBNZ's actions)…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… 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)'. That's what we're hearing for the vast majority of Kiwi businesses.
There are three scenarios for next week:
The first scenario, is lifeless. The RBNZ delivers a 25bp cut and leaves the OCR track at 3.1% or slightly below at 3.0%. This would not go down well. Wholesale market traders would drop bonds, pushing interest rates higher. The pivotal 2-year swap (interest) rate would rise from around 3.15% now to 3.25% (about 10bps). Mortgage rates would barely move… if anything, it might see a reduction in discounting.
The second scenario, is what we think they will do. A 25bp cut accompanied by a lower OCR track to 2.8% (or close to). Currently, most economists sit between a low of 2.5% (Kiwibank) and a high of 3%. This scenario will push most economist forecasts below 3% to a 2.5-2.75% range. The wholesale rate markets imply a terminal rate of 2.85-2.9%. 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. That's not what we need either.
The third scenario, is 'go for growth', generate greenshoots. A Doveish Hawkesby should put a 50bp move on the table, and an OCR track to 2.5%. The shock without Orr would see wholesale rates poleaxed. The 2-year swap rate would immediately test 3% (down from 3.15%), and ultimately fall towards 2.75%. All mortgage rates are likely to be lowered, as needed. A slightly watered-down version could be a 25bp cut and a much more dovish track to 2.5%
The RBNZ's current trajectory is unlikely, in our 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.