MNI: Markets Overestimating Lower OCR - Ex-RBNZ Officials

New Zealand’s Q2 GDP miss is unlikely to push the Reserve Bank to lower the 3% Official Cash Rate below 2.5% without weaker inflation data, former RBNZ officials told MNI, noting recent market pricing had likely overreacted to the economic growth miss.

Q2’s 0.9% GDP contraction, steeper than the RBNZ’s forecast 0.3% fall, reflected measurement noise and was not a reliable gauge of the economy’s health, said Michael Reddell, independent commentator and former RBNZ special adviser.

“I’ve long been picking the OCR to get to 2.5% and the result does nothing to lessen the chances of that outcome this year,” he said, adding CPI will remain critical for further cuts.

Markets swiftly repriced expectations, with swaps implying a 50bp cut at the October meeting and a further 25bp in November, taking the terminal rate to around 2.3%, following the GDP result. The RBNZ’s August projections had assumed a 2.5% OCR by Q1 2026. (See MNI INTERVIEW: RBNZ's Conway Sees Lower OCR On Weak Growth)

STICKY INFLATION

John Young, former Treasury adviser and RBNZ FX portfolio manager, cautioned that inflation pressures remain in parts of the economy, particularly food, complicating prospects for easing. “The MPC has a dilemma, because inflation is still a little bit sticky… that doesn’t help the overall narrative in terms of the cost-of-living crisis in New Zealand, and we are 12-14 months out from the next election, so there’s increased politicisation around the economy,” he said.

The Q2 GDP contraction represented a major miss, triggering swift market repricing on recession risk. But Young said the MPC would face a difficult choice if Q3 inflation overshoots the 3% rate the RBNZ forecast in its August Monetary Policy Statement. (See MNI RBNZ WATCH: MPC Makes Dovish 25BP Cut, Eyes 2.5% OCR) “And people are calling for OCR sub-2.5%, that’s a tough ask,” he added. 

Stats NZ will publish Q3 inflation data on Oct. 20, ahead of the Nov. 26 policy meeting.

Young also noted business investment may be constrained by political uncertainty and falling house prices, with households facing negative wealth effects despite some mortgage relief. However, he said markets may have overreacted to a single GDP print, with real-time indicators such as exports potentially pointing to a firmer economy in coming months. Some sectors and regions are performing better than others, he said, citing the dairy industry and Canterbury.