ANZ expects the Reserve Bank of New Zealand (RBNZ) to reduce the Official Cash Rate (OCR) by 50 basis points next week, lowering it to 4.25%.

This forecast aligns with both market expectations and economist predictions, as well as the RBNZ's guidance from October.

Although a 50bp cut is considered the most straightforward option, ANZ's chief economist, Sharon Zollner, commented, “if there is going to be a surprise, a larger cut seems likelier than a smaller one.”

In addition, direct inflation indicators remain subdued. ANZ's Business Outlook Survey found that companies anticipate a modest 2.6% increase in wages over the next year.

“While it’ll take some time for domestic inflation to fall back to where it needs to be, they’re winning,” Zollner added.

Labour market capacity indicators are positive, indicating that the economy can expand without triggering inflation. While sectors such as construction are showing signs of recovery, the retail sector continues to struggle.

As it stands, markets are mostly expecting a 50bp rate cut, with a 12% likelihood of a larger 75bp reduction. Traders will be closely watching to see if the RBNZ considered alternative options, such as a smaller 25bp cut.

“If 75bp is discussed but not delivered, markets may expect another 50bp cut in February rather than the standard 25bp,” Zollner stated.

ANZ anticipates minimal immediate impact on the New Zealand Dollar, as a 50bp rate cut is already priced in. However, additional short-term rate cuts could put pressure on the Kiwi, especially if US markets reconsider Federal Reserve policy.

The trajectory of the OCR will remain highly dependent on upcoming data, with a 12-week gap until the next RBNZ meeting allowing room for potential adjustments.

“Nothing is set in stone regarding the path ahead,” Zollner said.