BNZ has made the observation in its latest market outlook report, as the Reserve Bank ponders its decision ahead of next Wednesday's OCR and MPS.
Markets have become "undecided and twitchy" following the Fed's announcement it plans to make no further cuts in the near term.
"There has been a major recalibration of OCR expectations over the past week," the report says. "A week ago a November OCR cut was priced as a 90% chance. That probability now stands at 50%. The market’s conviction in a November OCR cut had already been slipping in recent weeks, in-line with the decline in RBA and Fed rate cut expectations and the big upside surprise to non-tradables inflation in the latest CPI report."
The bank's economists believe tomorrow's labour market data will be viewed as a key piece of information.
"With the market moving to pricing a November OCR cut close to 50/50 odds, from near fully pricing a cut around two weeks ago, the labour market data will be closely watched as the last major piece of information ahead of next week’s OCR decision."
BNZ economists believe stronger than expected data could sway the central bank to hold fire, unlike in August, when the OCR fell by 0.5%.
"Strong Q2 figures released the day before the August MPS did not deter a 50bps cut, as the RBNZ seemed intent on its course of action. If the committee is less committed this time around, the labour market data may have more bearing on the final decision."
The team of economists expect rates to fall again next week. If the OCR is kept on hold, they also warn interest rates could rise.
"We expect the RBNZ to cut in November, which should help contain the upside in NZ rates in the near-term. But it’s a judgment call for the RBNZ, and rates will go higher if it doesn’t cut."
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