* The RBNZ delivered on expectations, cutting the cash rate 50bps to 4.25%. There was no discussion of a 75bp move and a 25bp move… so the decision was pretty straightforward. Anything other than a 50bp would have been a shock, and hard to explain.
* Today’s move was just the tip of the iceberg. The really interesting stuff was underneath. The RBNZ’s OCR track, which provides guidance on future policy moves, was lowered and pulled forward. It had to be… because they’re cutting in 50s not 25s. But the endpoint was lifted a little to 3.06% (from 2.98%). That’s bang on the 3.1% rate implied in wholesale rates..
* Our view has been tweaked, a little. More cuts are required. And we need the cash rate below 4% asap. We advocate another 50bp move in February… but we now expect a 25bp move. And we’ve lifted our forecast terminal rate to 3%, no longer 2.5%. We’ve made these changes on the back of the RBNZ’s tweaks. But we note that the RBNZ may be too hawkish, again (as they were in May).
The RBNZ is more comfortable than we are in the economic scarring inflicted and recovery. We think we RBNZ may be moving in the wrong direction, as they did in May. Time will tell. And we have a lot of time until their next decision in February.
We remain cautious. Because we believe rates needs to be cut lower, than the RBNZ’s 2025 forecast track, to stimulate an economy struggling to get out of recession. And the real time data is still mixed at best.
If you need more proof of the recession, and the pain inflicted, then Kiwisaver withdrawals is it. “Hardship withdrawals” have spiked from $10 million is January 2023, to $38 million in October. These withdrawals are not easy to make. “To withdraw savings you will need to provide evidence you are suffering significant financial hardship.” Significant financial hardship as a direct impact of restrictive monetary policy settings.
The argument for a 75bp move was fair.
There’s a long wait for the next OCR cut in February. The RBNZ like their summer break, seasonally adjusted. So today’s decision is effectively a double decision, given the gap. But more importantly, we’re still a long way away from neutral. At 4.25%, rates are restrictive, and we’re deep in recession. We’re at least 75bps off the more pessimistic estimate of neutral at 3.5%, and 175bps off the lower estimate of 2.50%. No one sees neutral at 4% or above.
The admission of guilt may have been problematic. A 75bp move today would have been more of an admission that the RBNZ had overtightened. Even more so than the 50bp moves we’re getting – compared to the RBNZ’s August forecast of 25bp moves.
The argument for a 25bp move was premature.
Sure, they didn’t even discuss a 25. But they’re implying a 25bp cut in February. We’re strongly advocating for another 50bp, to get the cash rate below 4%. But the RBNZ is signalling 25. It’s too soon to be scaling back cuts at such restrictive levels.
The reaction in financial markets said it all
In the lead up to today’s decision, rates market traders were subjected to some very strong undercurrents out of the US. In the lead up to the US election, traders in the US started betting on a Trump victory. Such a victory was (and is) seen as inflationary first (the potential for large tariffs), pro-growth and pro-US business second, and inflationary third (more growth, more spending, more inflation). Add to that, more US Government debt. And all that requires higher interest rates. The large surge higher in US yields, put upward (steepening) pressure on Kiwi yields.
Longer-end Kiwi yields were pushed higher, the hardest, rising 60bps. Whereas, shorter-end Kiwi yields were pushed higher, a little less, rising 40bps. And then it all reversed.
The pivotal 2-year swap rate rose from a low of 3.52% on 1st October, to 3.93% by mid-October, and then back down to 3.61% leading into today’s announcement. Following today’s announcement we saw the 2-year lifted 14bps to 3.75%. That’s quite the hawkish reaction.
The rates market had 55bps priced in for today’s move. That’s a full 50bps, plus some bets on a 75bp move. Basically traders were willing to bet 5bp for a 20bp gain, if they’d cut 75bp today. It didn’t happen. And the RBNZ were much more hawkish than we expected. We had flashbacks of the MPS in May, when the RBNZ stepped in the wrong direction (again).
With the move in rates, the Kiwi dollar was better bid from 0.5815 to 0.5834.
