MNI INTERVIEW: RBNZ Done Easing After Next Cut - Fmr Economist

The Reserve Bank of New Zealand is expected to cut the official cash rate by 25 basis points to 2.25% next week, but persistent inflation is likely to fuel debate among monetary policy committee members and further easing in 2026 would be unlikely without significant global shocks, a former RBNZ economist told MNI.

“Inflation is a little bit stubborn if you look at food prices – 4.7% in the year ending October, up from 4.1% in September – if I were the Reserve Bank, I'd be worried about the flow through of that,” said Geof Mortlock, financial consultant and former financial stability advisor at the RBNZ, noting Q3’s 3% headline CPI print, which sits at the top of the 1-3% target band.

Core inflation is somewhat lower at 2.5%, but still in the upper half of the band, with wage pressures likely to persist given recent public-sector strike activity, he added. As migration slows and the labour market tightens next year, “wage price inflation might be a bit of a worry for the Reserve Bank,” he said. “There would be some on MPC who might look at the inflation data… and think, are we taking too much of a risk by lowering the OCR at this juncture. But I think on balance, they will … and then probably stabilise.”

Markets have fully priced in a cut next week and give a move lower in February a 31% chance. 

The Bank will also publish updated forecasts alongside the decision next week, but these are unlikely to change dramatically, Mortlock added. "I imagine they might alter their view somewhat on inflation expectations and where those are, as they seem to be settling at a somewhat lower level than they were, which is encouraging, but still above the midpoint of the inflation target range."

GLOBAL TURMOIL

Mortlock cautioned that global risks could still push the Bank toward additional easing, particularly if a major structural decline in U.S. and European equity markets emerges from elevated technology stock valuations linked to AI. In such a scenario, the OCR could fall below 2.25%, “maybe 50 basis points,” depending on how severe the downturn becomes, he argued.

But assuming global conditions remain merely fragile, he said the path for the OCR will depend on how quickly the output gap closes from its current estimated -1.5% to -1.7%. A slow recovery means capacity constraints are unlikely to drive inflation, though wage and price pressures could re-emerge if food, electricity, and council rates continue rising well above core inflation, he continued.

MPC, GOVERNOR CHANGES

Mortlock said the policy path will also hinge on leadership changes, pointing to the recently-appointed external MPC members and governor, due to start in 2026. 

“Time will tell what [newly-appointed Governor Anna Breman] will bring… whether she's a hawk or a dove.” The departure of Deputy and current Acting Governor Christian Hawkesby next year will also offer opportunity for further cultural change and greater MPC transparency, stronger governance and research capability, he added, noting the RBNZ’s “credibility has been sorely dented” in recent years. MPC meeting minutes should become more detailed, potentially including each member’s OCR vote and rationale, reflecting practices at Sweden’s Riksbank where the incoming governor previously served, he argued.

Mortlock also expects changes to bank capital rules, likely bringing the RBNZ closer to the Australian Prudential Regulation Authority's framework, and a rethink of macro-prudential tools such as loan-to-value and debt-to-income ratios, which he argues have been used too bluntly to manage the housing cycle rather than financial stability.