RBNZ likely to cut OCR by 25 bps with a mild bias towards further easing

Reserve Bank of New Zealand’s (RBNZ) monetary policy meeting is scheduled to be held on Wednesday, 9th November. The central bank at its previous meeting had strongly signalled further easing to ensure that future inflation settles near the middle of the target range.

That said, New Zealand's economy in terms of activity has been quite strong and inflation has been as subdued as expected. The downside risks that the RBNZ has highlighted in the past – particularly around dairy prices and inflation expectations – have clearly diminished.

However, a 25 basis point cut is almost fully priced into currency and interest rate markets and failure to deliver by the RBNZ could lead to an unwanted market response. Risk of an adverse market reaction is particularly high right now as Fed is on track of hiking and markets sensing that other central banks are shying away from further easing measures.

“We expect the Reserve Bank to reduce the OCR to 1.75 percent next week. The RBNZ may want to retain a mild easing bias, to discourage market speculation about the next move being up," said Westpac in its research note.