VIEW: Westpac Brings Forward Rate Cut As CPI Approaches Target

Q2 headline NZ CPI inflation came in lower-than consensus and the RBNZ expected at3.3% y/y with core down to 3.6%. This has prompted some forecasters to change their expectations around the timing of the first rate cut. Westpac now believes the first 25bp move will be in November followed by 25bp in February, April and May. Its forecast profile has been brought forward by about 6 months.

• Westpac observes that “recent data indicates economic momentum is recessionary and today's CPI data shows the long-awaited fall-off in domestic inflation pressures is upon us. We continue to expect the RBNZ to take a more cautious approach to OCR cuts than current market pricing.”
• With rates expected to be at 4.5% by mid-2025, Westpac thinks the RBNZ “will take a more cautious data dependent approach and reduce the OCR in 25 bp increments at the August and November 2025 Monetary Policy Statements bringing the OCR to 4% by end 2025. We see a final easing to 3.75% in early 2026 where we see the terminal rate.”
• “Today’s CPI data was a key part of the case for bringing forward OCR cuts from our longstanding view that easing would begin in February 2025. … todays CPI seems to vindicate the RBNZ’s view that inflation will soon be below 3%, giving them room to dial back restriction. Additionally, we think the RBNZ will be revising down its near-term economic view.”
• “Key will be the RBNZ’s revised forecasts at the upcoming Monetary Policy Statement on 14 August. We would expect these forecasts to show a significant downgrade in inflation and OCR forecasts. In the case of the OCR we expect something closer to the scenario they presented in May 2023. This implied a probability of an easing in October and a very likely easing at the November Statement.”