A substantial interest rate cut by the Reserve Bank of New Zealand appears increasingly likely this week, as economists and financial markets advocate for a faster reduction in borrowing costs.

The central bank began its easing cycle in August with a 25-basis point reduction to 5.25%, marking its first rate cut in four years and indicating the possibility of further cuts over the next two years. 

According to a Reuters poll of 28 economists, 60% expect a 50-basis point cut, and financial markets are nearly unanimous in anticipating this outcome

“It's a pretty significant step up on the pace, but we think it's quite well justified by the confidence in the inflation outlook,” said Westpac chief economist Kelly Eckhold.

“It looks now like you can be fairly sure that the CPI [consumer price index] will be printing at pretty close to a 2% level in the next three to six months.”

A 50-basis point cut would reduce the cash rate to 4.75%, the lowest level since March 2023.

However, as the poll indicates, not all experts are convinced about such a significant reduction; the remaining 11 economists anticipate a 25-basis point cut instead, RNZ reports.

All major banks - ANZ, ASB, BNZ, Kiwibank, and Westpac - are forecasting a 50-basis point cut this week and also at the final meeting of the year in late November.

Christina Leung, the principal economist at the Institute of Economic Research, is among those advocating for a 25-basis point cut. Her comments coincide with a rise in business sentiment reflected in various surveys, including the institute's Quarterly Survey of Business Opinion, which is closely monitored by the Reserve Bank.

“In the sense that from this recent move with the OCR cut, we've already seen such a strong rebound in terms of expectations for the coming months for activity,” Leung commented.

“We believe that there is still the case to be more conservative and cautious in terms of assessing the impact of the easing that it's done to date and thinking about the pace of further easing ahead.”

Meanwhile, Kiwibank senior economist Mary Jo Vergara said that the economy urgently requires rate relief.

“Interest rates as they are now, the cash rate as it is now, is too restrictive. Policy settings are too restrictive.

“There's no need for this sort of choke hold to be on economic growth anymore. We need that rate relief.”