This afternoon's official cash rate (OCR) decision by the Reserve Bank is expected to be a cut, but economists remain divided about how deeply interest rates will fall.
The central bank's monetary policy committee will almost certainly cut interest rates when it meets later today.
But economic experts are divided on whether it will be a quarter-point cut (0.25%) to 2.75% or a larger half-point (0.5%) reduction to 2.50%.
Kiwibank’s chief economist Jarrod Kerr speaks to Breakfast about what he thinks the central bank will announce this afternoon. (Source: Breakfast)
The Reserve Bank's decision will likely be predicated on how badly it thinks New Zealand's economic recovery is going and on the taming of inflation.
An OCR cut makes borrowing cheaper, encouraging households and businesses to spend and invest more, which helps boost economic activity.
Why another cut is a 'done deal'
Inflation, which was running hot at over 7% three years ago, has now cooled significantly and sits within the Reserve Bank's target range of between 1-3%.
As a result, the OCR has already been cut from a high of 5.5% over the past year.
It currently sits at 3% following August's monetary policy committee meeting. At that meeting, it signalled it would bring the rate down to 2.55% within the next six months.
Since then, new GDP figures for the second quarter showed a 0.9% fall. The numbers released in September were deemed a surprise and a shock to observers.
Meanwhile, a survey by the NZIER Quarterly Survey of Business Opinion released yesterday found a decline in business sentiment.
Just 3% of manufacturers surveyed expect economic conditions to improve. (Source: 1News)
A net 15% of firms expected an improvement in economic conditions over the next half-year, but that was down from 26% in the June quarter survey.
The case for going bigger
Several major bank economists, including ASB, Westpac and Kiwibank, are expecting a 50 basis point cut (0.5%), bringing the OCR down to 2.5% in one go.
Their thinking centres on the weakness of the economy and the urgency of getting interest rates down to levels that will actively stimulate growth.
"The fire of recovery needs more accelerant," said ASB chief economist Nick Tuffley.
"The OCR needs to go lower than recently thought, to a low of 2.25%, to get monetary conditions more into stimulatory territory."
ASB economists said the economy lacks strong drivers of growth.
"The main things the economy has going for it are interest rates falling back to more normal levels and a burst of good export incomes," Tuffley said.
Westpac chief economist Kelly Eckhold agreed that a bigger cut was needed.
"Quickly moving the OCR to a stimulatory level will generate confidence and activity ahead of the important Christmas and summer trading period," he said.
Moving faster now could also reduce the likelihood that even more cuts are needed next year, Eckhold added.
Meanwhile, Kiwibank economists put it bluntly, saying decision-makers needed to "go big for bang for buck" with today's decision being "pivotal in setting the trajectory in financial markets, and the wider economy, heading into 2026".
"It’s clear that our economy needs support. There’s simply no other way to put it: The Kiwi economy is underperforming. It’s underperforming our already weak forecasts," they wrote.
"If it was up to us, we would get there with a 50 basis points cut. The broad-based weakness in the Kiwi economy clearly warrants a bold move.
"We would also signal another 25 basis points cut in November."
They said that "anything less would see interest rates head higher... unhelpful. And the opposite of what the economy needs."
The case for caution
Meanwhile, ANZ and BNZ economists are sticking with forecasts for a 25 basis point cut (0.25%), although both acknowledge a larger move is very possible.
ANZ economist Sharon Zollner said she expected the Reserve Bank to cut to 2.75%, "with dovish messaging that leaves open the option of a 50 basis point cut in November".
"A 25 basis point cut reduces the risks of overshooting now that we are well through the easing cycle and leaves open maximum options from here.
"We also think the Reserve Bank will take care to not overweight the downside surprise to quarter two GDP given that data’s tendency to be revised, and instead look at the broader suite of economic indicators."
But she added, "there are also good arguments" for a 50 basis point cut instead.
BNZ economists said it was possible the Reserve Bank was "spooked by the weak quarter two GDP figures and cuts 50 basis points this week". But, "we are not convinced that will be the outcome at this point," saying they expected a 25 basis point cut.
A cut was a "done deal", they added.
So, what happens to mortgage rates?
The good news for borrowers is that mortgage rates have already been falling in anticipation of further OCR cuts.
Several major banks have cut key rates in the past week.
Kiwibank was the latest of the major banks to cut its one-year special fixed home loan rate, joining others at 4.49% on Monday.
BNZ also revised its rates yesterday with standard 6-month rate, two-year and three-year rates all dropping by 10 basis points, to 4.89%, 4.65% and 4.85% respectively.
Its 18-month rate fell 26 basis points to 4.49%.
Looking further ahead
Whichever option the Reserve Bank chooses, most economists agree that the OCR will need to go lower than the current 3% to support the economy's recovery.
The debate is really about timing and pace rather than direction. The Reserve Bank will also be conscious that this is one of the last major decisions with governor Christian Hawkesby, who will be replaced by Swedish central banker Anna Breman in December.
That changing of the guard may also influence thinking about how to position policy for 2026. New Zealanders should have their answer by later today.
A new OCR is announced at 2pm, with coverage to come from 1News.co.nz and TVNZ+.
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