MNI INTERVIEW: RBNZ To Cut Twice More - Ex Economist

The Reserve Bank of New Zealand is likely to cut the 3% Official Cash Rate by 25 basis points in both October and November, but further easing into 2026 will hinge on labour market weakness and spare capacity, a former senior RBNZ economist told MNI, adding that U.S. trade policy and the Federal Reserve could feed disinflationary pressures via currency markets. 

The lengthy gap between November’s decision and the Bank’s next meeting in February means the Monetary Policy Committee will want to move quickly to 2.5%, said Leo Krippner, now a research fellow at the Singapore Management University, noting August’s four-two split vote already showed a strong dovish tilt. (See MNI RBNZ WATCH: MPC Makes Dovish 25BP Cut, Eyes 2.5% OCR)

Krippner said that 2.5% would be a stimulatory level, repeating his view from earlier in the year that the neutral rate was likely at the upper end of the Bank’s 2.5-3.5% range or even closer to 3.5–4.5%. (See MNI INTERVIEW: RBNZ's Neutral Estimate Too Low - Ex-Economist)

“The decline in the OCR is not a reflection of a lower neutral rate – it’s that they want even more stimulatory monetary policy than before,” he said.

But further cuts below 2.5% would require a materially weaker economy, shown most clearly in unemployment and hours worked, he added. “If there are negative shocks, or if they’ve underestimated how deep the downturn is, then that will show in the unemployment numbers. The labour market has an intimate connection with the output gap and spare capacity in the economy."

Chief Economist Paul Conway told MNI after August’s cut that a weaker economy would warrant further easing, but stressed the Bank believed the worst was behind New Zealand.

Krippner's view aligns with market pricing, which implies a 2.5% rate by November. 

GLOBAL SPILLOVERS

Krippner warned U.S. trade policy and potential shifts at the Federal Reserve that push down the federal funds rate could damp inflation in smaller economies such as New Zealand and Australia. A perceived loss of Fed independence could also strengthen the kiwi and Australian dollars, lowering tradables inflation and prompting central banks to ease further to stabilise overall price growth.

"If you did have those developments in the U.S., they would have quite material implications for monetary policy in Australia and New Zealand, even if they were deliberately trying to continue to achieve their inflation mandates," he added.

Pointing to the motives behind the U.S. administration's strategy, Krippner agreed that governments have historically reduced debt burdens by inflating them away, but this strategy is harder today given central bank independence and more cautious bond markets. “Allowing higher inflation now is more difficult than it used to be in the 1970s,” he said.