Summary:
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• Today, the Reserve Bank of New Zealand (RBNZ) lowered its main interest rate by 0.50% to 4.75%. This matched what Westpac bank and financial markets expected.
• The RBNZ says the economy now has more supply than demand. This should help prices and wages adjust to lower inflation levels.
• The RBNZ described economic activity as "quiet". They noted that businesses and consumers are spending less, and job market conditions are getting weaker. They partly blame this on their strict monetary policy.
• The RBNZ's decision-making committee agreed that a 0.50% rate cut was the best way to keep inflation under control. They also want to avoid unnecessary disruptions to economic output, employment, interest rates, and currency exchange rates.
• We (Westpac) predict another 0.50% rate cut on November 27. We also expect the main interest rate to fall to 3.75% in the first half of next year.

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OCR cut 50bps as expected as inflation risks move into better balance.

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The Reserve Bank of New Zealand (RBNZ) has cut its Official Cash Rate (OCR) by 0.50% to 4.75%. This decision was expected by Westpac, most economists, and the financial markets. The RBNZ suggests another 0.50% cut might happen at their next meeting on November 27, if economic data remains as expected.

In their statement, the RBNZ described the economy as "subdued", partly due to their strict monetary policy. They noted that business investment and consumer spending are weak, and job market conditions are getting softer. On a positive note, some exporters are benefiting from better export prices. However, global economic growth is slow, with expectations of slower growth in the US and China. The RBNZ believes New Zealand's economy now has more supply than demand, which should help bring inflation down. Lower import prices are also helping to reduce inflation.

The RBNZ's Monetary Policy Committee (MPC) considered whether to cut the OCR by 0.25% or 0.50%. They chose 0.50% as it best fits their goal of keeping inflation low and stable while avoiding unnecessary economic disruptions. The committee noted that current market expectations align with this decision.

Following the announcement, financial markets showed a small reaction. Interest rates fell slightly, with the 2-year swap rate dropping by 0.07% to 3.64%. The New Zealand dollar also weakened a bit, falling by about 0.25 cents against the US dollar.

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Our view: Another 0.50% rate cut likely on November 27

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The Reserve Bank of New Zealand (RBNZ) has acted as we expected. They think there's no reason to keep cutting rates slowly by 0.25% each time. This is because the economy is weak and inflation is likely to reach 2% soon. The RBNZ still believes the current interest rate of 4.75% is high enough to slow down the economy.

We didn't see any signs that the RBNZ disagrees with our prediction of another 0.50% rate cut in November. This matches what financial markets expect too.

The RBNZ says future decisions will depend on new economic data. The most important reports to watch are:

• Consumer Price Index (CPI) on October 16
• Labour market reports on November 6

We don't think these reports will change the RBNZ's plan to cut rates by another 0.50% on November 27.

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Important upcoming data and events

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Before the RBNZ's next policy review, several key events are coming up. Here are the most important ones:

• Inflation report (16 October): We expect the Consumer Price Index (CPI) to be close to 2.3% year-over-year, which is what the RBNZ predicted in August.
• RBNZ speech on policy effects (16 October): Karen Silk from the RBNZ will talk about how their decisions affect financial conditions. This might give us clues about how the RBNZ views recent rate cuts.
• Job market report (6 November): We think the unemployment rate might rise to 5.0%. We'll also look at wage growth to see if it's slowing down as the job market gets less tight.
• RBNZ survey on future expectations (11 November): The last two surveys showed people expect lower inflation. This helped the RBNZ decide to cut interest rates. We'll watch this new survey closely.
• Global events: The US election (5 November) and the US central bank meeting (7 November) could affect the economy and financial markets. Any new economic boost from China could also be important.

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The RBNZ will also keep a close eye on:

• Business activity measures.
• Consumer spending.
• Housing market activity and prices.
• Export and import prices.
• Financial conditions, including exchange rates.

All these factors will help the RBNZ make its next decision.