NZ Economic Bulletin: Updated medium term forecasts for the OCR and long-term interest rates
We continue to expect two more OCR cuts in 2024. We’ve pulled forward our forecast for rate cuts the following year and expect the OCR will fall to 3.75% by the end of 2025. We’ve also updated our long-term wholesale interest rate forecasts.
The RBNZ unexpectedly eased the OCR this week by 25 bp and signalled a further 50 bp of OCR cuts in 2024. We endorsed that view immediately after that announcement as it merely represented a shift forward of the easing cycle we expected to begin in October by six weeks or so. Certainly, the weakness in the economy seen in the last few months seemed to justify a shift forward in policy easing from the RBNZ’s very hawkish position back in May.
Today, we are supplementing those 2024 OCR forecasts with an updated medium-term view. We didn’t see much in the RBNZ’s policy statement and forecasts that changed our thinking too much. Hence, we have shifted forward our OCR profile by one meeting to reflect the earlier start to easing, but retain the same terminal OCR forecast of 3.75% - which will now be achieved at the end of 2025 as opposed to early 2026. We expect the pace of policy easing to slow down in 2025. We think the RBNZ will be adopting a very measured and data dependent approach while continuing to reduce the degree of restriction at each Monetary Policy Statement in 2025.
There will naturally be risks around this new central expected policy path, which means that any forecasts in 2025 remain indicative at best. We see these as two-sided and highly dependent on the extent of the bounce-back in activity and housing market indicators over the second half of 2024 and through early 2025, as well as the path of core inflation pressures. Perhaps the most significant deviation between the RBNZ’s forecasts and our own is the speed at which non-tradables inflation falls from the end of 2024. We expect that disinflation to proceed more gradually than the RBNZ does, and as such it will likely increase risks that the RBNZ eases more carefully, or perhaps stops easing sooner, through 2025. On the dovish side, a critical near-term risk to the OCR path will be the level of economic activity and the rate of unemployment. Should activity continue to be as weak as experienced in the June month, then prospects for an even more front-loaded easing cycle would increase, with the potential for the RBNZ to take interest rates below our neutral OCR estimate of 3.75% in the latter part of 2025. Similarly, if other factors seem set to drive tradables sector inflation persistently below historical norms such that inflation expectations shift significantly below 2%, then this could open the policy path to a period of below neutral rates.
We have also adjusted our long-term wholesale interest rate forecasts to reflect the changed short-term interest rate profile. We now see 2- and 5-year swap rates bottoming out around current levels over the next few months and then gradually increasing. Our view is that markets will continue to price in a lower terminal OCR for the next 6-12 months but will gradually adjust those views upwards from the current market pricing of below 3% to something closer to our estimate of 3.75% later in 2025 when it should be apparent that the economy is responding to lower interest rates and inflation will settle at or slightly above 2%.
NZ Official Cash Rate and Wholesale Interest rate forecasts
| Date (end of quarter) | OCR | 2 yr swap | 5 yr swap |
|---|---|---|---|
| 2024 Q3 (a) | 5.25% | 3.80% | 3.65% |
| 2024 Q4 | 4.75% | 3.90% | 3.80% |
| 2025 Q1 | 4.50% | 4.00% | 3.95% |
| 2025 Q2 | 4.25% | 4.00% | 4.10% |
| 2025 Q3 | 4.00% | 4.00% | 4.20% |
| 2025 Q4 | 3.75% | 4.00% | 4.25% |
We affirm the exchange rate forecasts included in the August Economic Overview. The key story there was an expectation of NZD underperformance – notably against the Australian dollar – as the macro picture and interest rate cycles are clearly diverging in ways that should undermine the NZD/AUD in the period ahead.
Media contact
Kelly Eckhold, Chief Economist
T +64 9 348 9382
M +64 21 786 758
E kelly.eckhold@westpac.co.nz
X @kellyenz
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