RBNZ OCR to further fall to 2.0% by December

The plunging exchange rate is the one development that genuinely does argue against interest rate cuts. However, the exchange rate has not fallen far enough the RBNZ still has a lot of work to do to return inflation to two percent on average over the medium term.

The final significant piece of context for the OCR outlook is comments that were made by the Minister of Finance about a week after the June MPS. The Minister had this to say about inflation relative to the inflation target:
"He's been out of the zone for years now, below the midpoint for quite a long time. He's meant to be following the Policy Targets Agreement, that's the bit I look at, and one day somebody will start asking the minister of finance questions about whether he's actually following the agreement or not."

"With all of the above in mind, it now seems abundantly clear that the RBNZ will reduce the OCR further and faster than it signalled in the June Monetary Policy Statement. We now expect the OCR to fall to 2.0% by the end of this year. There are better than even odds of a 50bps cut at some point during the year", says Westpac.

For Thursday, an OCR cut of some description is a slam dunk. The RBNZ might cut 25bps and will use strong language to describe the likelihood of further OCR cuts, the policy guidance sentence would be something like: "It is likely that significant further reductions in the OCR will be required in the months ahead."