NEW ZEALAND: VIEW: Westpac Expects 100bp Of Easing By Mid-2025

Westpac has revised its expected OCR path in 2025 following the significantly weaker-than-expected Q3 GDP data released earlier today. It continues to forecast a 50bp rate cut at the February 19 decision but now also believes there will be 25bp on April 9 and May 28 bringing rates to 3.25%, where it should stay until end-2025. Westpac estimates neutral at 3.75% and so conditions should be “more stimulatory”, which may drive an extra OCR increase “later in 2026” bringing policy “back to neutral”.

• Today’s national accounts included revisions from annual data updates, which resulted in Q2 and Q3 2024 “falling a cumulative 2.1%”, which tells “us that past interest rate increases were biting harder into the economy than generally appreciated.”
• There were upward revisions prior to this but Westpac thinks the changes make it likely that the RBNZ will “estimate a weaker starting point for the output gap”. “Even though today’s data has no bearing on the recovery that we now believe to be underway, that recovery will take longer to remove the excess capacity”, which “implies slightly less pressure” on inflation.
• Westpac is projecting a return to “modestly positive” growth in Q4, which was suggested by the ANZ business survey. However, “the degree of pick up that occurs will be critical in determining the size and number of cuts that occur after February.”
• “GDP growth was revised higher in 2022 and 2023, implying stronger productivity growth over that period than estimated previously.”