Bad news: unemployment rises, with no hope of a 75 basis point cut?! Good news: consensus builds around 50 basis points!

In recent weeks, the possibility of the Reserve Bank of New Zealand making a substantial 75 basis point interest rate cut in November briefly became a hot topic. Economists generally believed that, if the economy deteriorated further, the Bank would be likely to adopt more aggressive monetary policy before Christmas to address slowing economic growth. However, the latest unemployment figures suggest that conditions have not deteriorated enough to warrant such aggressive easing. The data also shows that unemployment rose from 4.6% in the previous quarter to 4.8% in the September quarter. Against this backdrop, most economists have shifted to supporting a 50 basis point cut.

Infometrics chief economist Brad Olsen

Infometrics chief economist Brad Olsen previously noted that the Reserve Bank would begin a long summer break of three months after its November monetary policy meeting, so a substantial 75 basis point cut at that point could provide more policy room for the future. He said the size of the November cut would be an important decision in maintaining the Bank’s easing momentum. Now, however, he believes that, as unemployment rises, the Bank may favour a 50 basis point cut, easing policy gradually rather than making an aggressive adjustment.

ASB chief economist Nick Tuffley

ASB chief economist Nick Tuffley also noted that the three-month gap between policy decisions does increase the likelihood of a large cut. However, with the OCR still at 4.75%, well above the ‘neutral interest rate’ range of 3%–4%, a measured 50 basis point cut would be sufficient to signal an intention to ease. Tuffley believes that, while consecutive cuts of 50 basis points would appear relatively ‘aggressive’, they would reflect a swift response to current economic conditions. Compared with a single large adjustment, this approach would support a smoother transition.

Kiwibank senior economist Mary Jo Vergara

Kiwibank senior economist Mary Jo Vergara said that, although rising unemployment indicates some weakness in the labour market under the Reserve Bank’s restrictive policies, inflationary pressures have gradually eased. The Bank should therefore continue easing monetary policy, gradually lowering the OCR below 4%. Vergara forecasts a 50 basis point cut in November, potentially followed by another 50 basis point cut in February next year, to help limit the rise in unemployment while supporting a soft landing for New Zealand’s economy.

Westpac senior economist Michael Gordon

Westpac senior economist Michael Gordon agreed. He believes monetary policy no longer needs to remain so restrictive, and that the Reserve Bank should now ‘slowly release the brakes’ rather than ‘slam on the accelerator’. He expects another 50 basis point cut this month, followed by a shift to a gentler pace of easing in the first half of next year.

New Zealand Institute of Economic Research senior economist Ting Huang

Ting Huang, a senior economist at the New Zealand Institute of Economic Research (NZIER), concluded that, although the labour market shows signs of slowing, the data contains no ‘conclusive signals’ strong enough to prompt aggressive action by the Reserve Bank. She said the Bank’s current strategy should be to cut rates by 50 basis points at its November meeting, then adopt a more measured easing pace, gradually moving interest rates into a less restrictive range. Commercial institutions including ASB, Westpac and BNZ share this view. They generally believe that, with the labour market weakening and inflationary pressures easing, the Bank should take a measured approach to rate cuts to support economic recovery and safeguard employment.

Looking ahead to the Reserve Bank of New Zealand’s latest monetary policy announcement on 27 November, do you think a 50 or 75 basis point cut is more likely? Share your views in the comments below.