RBNZ October 7 Decision: What to Watch

Meeting: October 7, 2025 @ 2:00 PM NZDT | Current OCR: 3.00% | Last Change: -25bp (Aug 20)

Market Consensus

Base Case: 25bp cut to 2.75% (55% probability)

Rising Risk: 50bp cut to 2.50% (40% probability)

The biggest development since the August meeting has been the shocking GDP release. Here's what changed:

1. The GDP Shock

Key Point: Economy contracted three times worse than RBNZ projected just 6 weeks ago.

Beyond the quarterly GDP data, more timely indicators paint a mixed picture of the economy's current state:

2. High-Frequency Indicators

Balance: Broad weakness with only modest recovery signs in retail and employment ads.

Here's where it gets tricky for the RBNZ: they're making this decision without key quarterly data:

3. Critical Data Gaps

Challenge: RBNZ must decide without two critical quarterly data releases.

Given the data we have—and what's missing—here's how markets are pricing the decision:

4. Decision Scenarios

While a 25bp cut remains the baseline, the case for a larger move has strengthened considerably:

5. Why 50bp Is Increasingly Likely

1. Massive GDP Miss: -0.9% vs -0.3% is a major forecasting error

2. Broad Weakness: Manufacturing, services, consumer confidence all deteriorating

3. No Recovery Despite 250bp of Cuts: OCR fell from 5.5% to 3.0%, yet weakness persists

4. Inflation Clearly Temporary: Food/admin prices driving spike, core inflation declining

5. Risk of Falling Behind: Gradual approach may be too slow given economic fragility

Regardless of the rate decision, the language in the statement will signal the RBNZ's medium-term intentions. Watch for these key phrases:

6. Key Statement Watch Points

The Monetary Policy Statement will include updated economic projections. Given recent data, expect material downgrades:

Now let's break down how tomorrow could unfold. The decision itself matters less than the combination of rate move + forward guidance. Here are the four main scenarios and how to distinguish them:

7. Likely Scenarios & How They Could Differ

Base Scenario (Most Likely): 25bp Cut to 2.75%

Probability: ~55%

The Decision: OCR reduced 25bp to 2.75%

The Statement:

• "Further OCR reductions are likely as we move toward neutral settings"

• Acknowledges GDP weakness but emphasizes gradual approach

• Notes Sep Q inflation/labour data not yet available

• Maintains inflation back to midpoint in 2026

The Press Conference:

• Governor Orr emphasizes data-dependency

• Balanced tone: concerned but not alarmed

• Suggests November could be 25bp or 50bp depending on data

Market Impact: Minimal (already priced).

Why This Makes Sense: RBNZ historically prefers gradualism. With Sep Q CPI/labour data unavailable, justifies measured approach while leaving door open for larger November cut.

Dovish Scenario 1: 50bp Cut + Continued Easing Signal

Probability: ~25%

The Decision: OCR reduced 50bp to 2.50%

The Statement:

• "Economic conditions have deteriorated more than expected, requiring a more substantive policy response"

• "The Committee expects further reductions in the OCR will be needed"

• GDP forecast downgraded to -1.3% to -1.5% for 2025

• OCR trough projection lowered to ~2.25%

The Press Conference:

• Governor Orr: "We're still above neutral and need to get there faster"

• Emphasizes risk of inflation undershooting medium-term

• Signals likely 25bp cuts in November and February

Market Impact: NZD negative, Equities positive.

Why This Makes Sense: If RBNZ views GDP miss as signaling deeper weakness requiring aggressive response. Continued easing guidance helps avoid inflation undershooting.

Dovish Scenario 2: 50bp Cut + "Pause" Signal (Front-Loading Strategy)

Probability: ~15%

The Decision: OCR reduced 50bp to 2.50%

The Statement:

• "The Committee judged that a larger reduction now allows us to reach neutral settings more quickly"

• "At 2.50%, the OCR is now approaching a more neutral stance"

• "Future OCR decisions will be highly data-dependent as we assess the transmission of past easing"

• OCR trough projection ~2.25% to 2.50% (ambiguous)

The Press Conference:

• Governor Orr: "We've now delivered 300bp of cuts from the peak"

• "We need time to see how this substantial easing transmits through the economy"

• Refuses to pre-commit to November action: "Everything depends on Sep Q data"

• Signals higher bar for further cuts without evidence weakness persisting

Market Impact: Initial NZD drop but rebounds on pause signal. Yields fall then stabilize. Curve flattens.

Why This Is A Real Possibility:

• Front-Loading Logic: Get to 2.50% (near neutral) in one move rather than two 25bp cuts

• Transmission Lags: 300bp of cuts since May (5.5% → 2.5%) need time to work through economy

• Data Gap Justification: Without Sep Q CPI/labour data, RBNZ can argue for pause to assess

• Avoid Overshooting: If inflation falls faster than expected, 50bp + pause prevents under-easing

• Optionality Preservation: Can resume cuts in November if Sep Q data confirms weakness

• Communication Challenge: Harder to justify gradual 25bp steps if economy deteriorating rapidly

Expert Assessment: This scenario is plausible (~15% probability) and represents sophisticated central banking. RBNZ could judge that:

1. Economy needs lower rates now (justifies 50bp)

2. But uncertainty is high (justifies pausing to assess)

3. Past easing needs time to transmit (5 cuts in 6 months is substantial)

The key risk: markets may interpret "pause" as policy error if weakness continues. RBNZ would need to clearly communicate "data-dependent pause" not "we're done."

Hawkish Scenario: Hold at 3.00%

Probability: ~5%

The Decision: OCR unchanged at 3.00%

The Statement:

• "The Committee judged it prudent to await Sep Q inflation and labour market data"

• Acknowledges GDP weakness but notes inflation near top of band

• Emphasizes uncertainty around inflation trajectory

The Press Conference:

• Governor Orr defends decision to wait for hard data

• Suggests November likely to see cut if CPI confirms disinflation

Market Impact: NZD Bullish, yields positive, stocks negative.

Why This Is Unlikely: GDP miss too severe. Market would view hold as policy error risking deeper contraction.

8. Bottom Line: What Really Matters

Regardless of whether RBNZ cuts 25bp or 50bp tomorrow, the key insight is this:

The easing cycle is clearly underway and far from finished. The debate is about pace (gradual vs front-loaded), not direction.

Watch These Instead of Just the Rate Decision:

• OCR Projection Path: Where does RBNZ see the trough? 2.25%? 2.50%? This matters more than tomorrow's move.

• Forward Guidance Language: "Likely", "expected", or just "possible" for future cuts?

• GDP Forecast Revisions: How much do they downgrade 2025 growth?

• Inflation Characterization: Is the spike "temporary" or do they hedge?