ANZ believes this will likely be the final cut in the current easing cycle, barring any global economic shocks.
The bank suggests the RBNZ will leave the door open to further cuts to prevent a potential reversal in monetary conditions over the summer.
Recent economic data has largely aligned with the RBNZ’s expectations, with signs that the economy is responding to easier monetary conditions.
The unemployment rate of 5.3 per cent matched forecasts, while Q3 inflation hit 3.0 per cent, the top of the RBNZ’s target band.
ANZ Chief Economist Sharon Zollner said that while the RBNZ’s economic models might not indicate a necessary cut, strategic considerations favour one more reduction.
“A 25-and-done (and even more so no cut at all) would risk a rush of mortgage fixing and unwinding of offshore dovish positioning that could put significant upward pressure on wholesale interest rates,” Ms Zollner said.
The economy is showing clear signs of recovery, with business confidence improving sharply in October.
The ANZ Business Outlook survey revealed a significant lift in sentiment, particularly in the retail sector.
High-frequency data indicates emerging consumer activity, with discretionary spending in categories like cafes and restaurants showing improvement.
Google search trends for construction-related terms have also increased substantially, suggesting a potential uptick in renovation activity.
“The economy is now clearly responding to the easing delivered. However, it is off a low base, and it’s also true that the recovery could be impaired if the RBNZ doesn’t play its cards carefully next week,” Ms Zollner said.
Financial markets are currently pricing in a 25bp cut as virtually certain.
ANZ believes a 50bp cut is unlikely given the improving economic conditions and the fact that inflation is already at the top of the target band.
The RBNZ’s previous 50bp cut in October was viewed as bringing forward two cuts that were signalled in August, rather than indicating a need for significantly more easing.
Job advertisements and building consents appear to be trending upward, though not yet suggesting upside risks to the Reserve Bank’s outlook.
The housing market remains relatively flat, but ANZ has revised up its forecast for house price growth this year for the first time all year.
“Turning points are hard to diagnose in real time, and the recovery this year has certainly been disappointing. However, the delay does not suggest that monetary policy is broken, and the RBNZ will be wary of oversteering again,” Ms Zollner said.
