Synopsis:

Westpac anticipates the RBNZ will cut the Official Cash Rate (OCR) by 50bps to 4.25% at Wednesday’s policy review, aligning with market expectations. The reaction will hinge on forward guidance, particularly for 2025, as the RBNZ navigates inflation and economic activity trends.

Key Points:

• 50bps Cut Likely:

  • Westpac assigns an 80% probability to a 50bps OCR reduction at this meeting.
  • The bank sees only a 15% chance of a slower 25bps cut and a 5% chance of a more aggressive 75bps reduction.

• Market Pricing and Implications:

  • With a 50bps cut already priced in, the market's focus will shift to guidance on the OCR trajectory for 2025 and beyond.
  • Westpac expects the RBNZ to project the OCR declining to 3.50% by the end of 2025, a more front-loaded easing path than the 3.85% forecast in August.

• Drivers of the Outlook:

  • Inflation has been tracking below RBNZ’s previous forecasts, bolstering confidence in easing.
  • Activity and labor market conditions are broadly in line with expectations, reducing the urgency for deeper cuts.

• Longer-Term Guidance:

  • RBNZ’s forecast will likely reflect a slower pace of easing in 2025, assuming continued progress in inflation normalization.

Conclusion:

Westpac expects a 50bps cut at the November RBNZ meeting, consistent with market pricing. The focus will be on forward guidance, particularly projections for 2025, with the bank forecasting a slower, more measured easing trajectory as inflationary pressures continue to recede.