The Reserve Bank (RBNZ) has cut the Official Cash Rate (OCR) to 3.25%, from 3.5%, but is not forecasting much more of a reduction - even as it has sharply cut back its expectations for GDP growth this year.
Arguably most interest in the latest announcement is around what might happen to the OCR in the future beyond the latest cut.
The RBNZ's new forecasts contained in the May Monetary Policy Statement (MPS) show the RBNZ is forecasting the OCR will likely be around 3.00% by the end of 2025. The projection now sees a low point for the OCR of maybe 2.75% by March - though it is hedging its bets between 2.75% and 3.00%. This is not much lower than the projections made in February and may disappoint some bank economists looking for more stimulus from the RBNZ.
Perhaps surprisingly the decision to cut on Wednesday by the Monetary Policy Committee actually went to a vote, with one of the six members voting against and there was discussion around keeping the OCR unchanged. It's only the second time an OCR decision has gone to a vote as they are usually an agreed consensus.
The notes for the MPC meeting said that in considering the merits of holding the OCR unchanged at 3.5% for this meeting, "some members noted that this would allow the Committee to better assess whether increased economic policy uncertainty was having a noticeable impact on household and firm behaviour".
An unchanged OCR could also further consolidate inflation expectations around the target mid-point, and guard against the risk of higher-than expected inflation from the supply-side effects of increased tariffs, the notes said.
The debate around keeping the OCR unchanged came even though the MPC conceded that the economic outlook was now weaker.
RBNZ Governor Christian Hawkesby, who has been appointed to the job for six months, said recent developments in the international economy "are expected to reduce global economic growth".
"Both tariffs and increased policy uncertainty overseas are expected to moderate New Zealand’s economic recovery and reduce medium-term inflation pressures. However, there remains considerable uncertainty around these judgements."
In the latest forecasts in the new May Monetary Policy Statement, the RBNZ is now forecasting that GDP for the March quarter will have been growth of 0.4%, which is down from the February forecast it made of 0.6%. Worse follows, with the forecast for the June quarter having been halved from +0.6% to +0.3% and the September 2025 quarter forecast dropping to +0.2% from 0.5%, before the December quarter is forecast to see 0.9% growth, up from the February forecast of 0.6%.
Unemployment was 5.1% as of the March quarter. The RBNZ is still forecasting a peak of 5.2%, but has now pushed this out later. It sees unemployment reaching the 5.2% level in the June quarter, staying there in September quarter and then dropping back to 5.1% in the December quarter.
Wednesday's cut to the OCR had been widely expected after then RBNZ Governor Adrian Orr had strongly indicated back in February that there would be back-to-back 25 basis-point cuts at each of the April and May reviews.
Over half of the country's $370 billion mortgage pile is due to have an interest rate reset between March and September of this year, so, many people will be in a position to benefit from the latest OCR cut.
The RBNZ has been cutting the OCR after gaining confidence that the period of elevated interest rates has helped to rein in inflation.
Inflation soared through 2021-22, peaking at 7.3% in June of 2022. The RBNZ responded by hiking the OCR all the way from just 0.25% till the start of October 2021 up to 5.50% in May 2023.
Inflation responded slowly at first, but moved back into the aimed for 1% to 3% range in the second half of last year and just above the RBNZ's explicit target of 2.0%. However, it's since been moving up and was 2.5% as of the March 2025 quarter and is expected to go higher.
The RBNZ is expecting that 'headline' annual inflation will reach a peak of 2.7% in the September quarter, although it said on Wednesday the inflation rate would remain within the 1% to 3% target range and gradually converge on the explicit 2% target.
This is the statement from the Reserve Bank:
The Monetary Policy Committee today voted to lower the OCR by 25 basis points to 3.25 percent.
Annual consumers price index inflation increased to 2.5 percent in the first quarter of 2025. Inflation expectations across firms and households have also risen. However, core inflation is declining and there is spare productive capacity in the economy. These conditions are consistent with inflation returning to the mid-point of the 1 to 3 percent target band over the medium term.
The New Zealand economy is recovering after a period of contraction. High commodity prices and lower interest rates are supporting overall economic activity.
Recent developments in the international economy are expected to reduce global economic growth. Both tariffs and increased policy uncertainty overseas are expected to moderate New Zealand’s economic recovery and reduce medium-term inflation pressures. However, there remains considerable uncertainty around these judgements.
Inflation is within the target band, and the Committee is well placed to respond to domestic and international developments to maintain price stability over the medium term.
Summary of Monetary Policy Committee meeting:
Annual consumers price index (CPI) inflation remains within the Monetary Policy Committee’s 1 to 3 percent target band. While measures of inflation expectations have increased, core inflation and spare productive capacity in the economy are consistent with inflation returning to the target mid-point over the medium term. Elevated export prices and recent reductions in the OCR are expected to support a modest pace of growth in the New Zealand economy, even as increased global tariffs are expected to slow global economic growth.
Higher global tariffs and policy uncertainty are expected to lower global growth
The Committee noted that projections for global economic activity have weakened since the February Statement, reflecting the shift towards protectionist policies in some major economies. There have been downward revisions to economic growth projections for China and the US, reflecting the scale of tariff increases between these two countries.
The Committee noted that, in addition to the direct effect of higher tariffs, increased policy uncertainty in the international economy is likely to weigh on global investment and consumption. As well as uncertainty about tariff retaliation, it was unclear how countries would respond with fiscal and monetary policies. For example, it is possible that China could respond to weaker economic activity with a sizeable fiscal stimulus. US fiscal policy could place strains on the sustainability of its public debt. More generally, the uncertain trajectory of geoeconomic fragmentation and the decline in the quality of macroeconomic institutional arrangements were likely to result in precautionary behaviour by firms and households. In aggregate, economic growth in New Zealand’s main trading partners is expected to remain below potential over 2025.
Headline inflation within New Zealand’s trading partner economies has fallen over the past year. Projections for inflation for most of our trading partners have been revised down in recent quarters. The main exception is the US, where higher tariffs are expected to increase inflationary pressure.
The New Zealand economy is starting to recover, after contracting over the middle of 2024
The Committee noted that spare productive capacity remains in the New Zealand economy. This is projected to dissipate over the medium term as the economy recovers. Elevated export commodity prices and lower interest rates are supporting overall economic activity in the New Zealand economy. The Committee noted that the full economic effects of cuts in the OCR since August 2024 are yet to be fully realised.
The Committee discussed conditions in New Zealand’s labour market. Nominal wage growth is slowing, while firms report that it is easier to find workers. Employment growth is currently modest but expected to increase from the second half of the year in line with the broader economic recovery.
The announced increase in US tariffs will lower global demand for New Zealand’s exports, particularly from Asia, constraining domestic growth. Heightened global policy uncertainty is expected to weigh on business investment and consumption in New Zealand.
On balance, the Committee expects the increase in global tariffs to result in less inflationary pressure in the New Zealand economy. However, as discussed below, there is significant uncertainty about this assessment, depending on whether the impact of tariffs proves to be predominantly demand- or supply-side in nature. The domestic monetary policy response will focus on the medium-term implications for inflation.
Domestic fiscal policy is assessed as being broadly neutral from a medium-term inflation perspective, relative to February Statement projections. The change announced in Budget 2025 enabling businesses to bring forward depreciation allowances is assumed to increase investment activity. However, the inflationary consequences of this policy are assumed to be offset by an announced reduction in government spending.
Annual CPI inflation is expected to remain in the target band, and converge to the mid-point
The Committee discussed domestic inflationary pressure. New Zealand’s annual CPI inflation increased to 2.5 percent in the March 2025 quarter, largely in line with previous projections. Most annual core inflation measures continued to decline in the March 2025 quarter, and all are now within the target band for headline CPI inflation.
Annual CPI inflation is projected to increase to 2.7 percent in Q3 2025, then return to near the 2 percent target midpoint from 2026. The near-term increase in headline inflation includes higher food and electricity price inflation.
Non-tradables inflation is expected to continue to decline, consistent with spare productive capacity in the economy. Annual tradables inflation is projected to remain around 1 percent over the medium term, reflecting below average global growth and falling inflation within our trading partners.
The financial system remains stable
The Committee noted that most wholesale interest rates have fallen since the February Statement, resulting in lower mortgage and term deposit rates. The average interest rate on the stock of mortgages is expected to continue to decline in coming quarters as more mortgage holders refix at lower fixed-term interest rates. Close to half the stock of mortgages is due to reprice during the June and September 2025 quarters.
The Committee was briefed on financial system stability. While non-performing loans in the housing and small business sectors have increased in line with the past contraction in the economy, the banking system remains well capitalised and in a strong financial position to support customers. The Committee agreed that there is currently no material trade-off between meeting inflation objectives and maintaining financial system stability.
The Committee was briefed on the status of the Large Scale Asset Purchase programme. The Committee noted there has been increased volatility in domestic wholesale interest rates, reflecting increased global policy uncertainty. Despite this volatility, wholesale interest rate markets continue to function, without impeding monetary policy transmission.
Risks around the economic outlook are heightened
The Committee discussed several key risks around the central projection. Measures of business and household inflation expectations have increased. The Committee discussed whether this increase reflected factors like higher food prices and current reporting on the inflationary effect of tariffs in the US. The projections assume that medium-term inflation expectations remain consistent with the target mid-point. Some Committee members emphasised the risk that these increases reflect a more generalised and persistent increase in inflation expectations.
The Committee discussed the medium-term outlook for import prices. Members noted that a less productive global economy, against a background of deglobalisation, presents an upside risk to the current import price projection.
The Committee noted downside risks to the outlook for export prices. This reflects a weaker global growth outlook and the potential for a quicker international supply response to high prices from global meat and dairy producers.
The Committee noted the risk that large economic policy shifts in overseas economies could lead to additional volatility in financial markets. For example, concerns about US debt sustainability could lead to increased bond yields or declines in global asset prices.
There are alternative scenarios for the domestic outlook
In addition to the uncertain scale and duration of tariff policies, it is unclear how these will transmit to the New Zealand economy. Some members emphasised that the costs of trade could increase more than currently assumed, as global supply chains adapt to trade barriers and geoeconomic fragmentation. This could result in greater domestic medium-term inflationary pressure than in the central projection. Other members emphasised that policy uncertainty could lower global investment, and trade diversion could lower import prices by more than currently assumed. This could, instead, lower medium-term inflationary pressure relative to the central projection.
Two scenarios in the May Statement highlight how the realisation of these risks could affect the outlook for the domestic economy. These scenarios represent just two of many paths the economy may take as higher tariffs and uncertainty transmit through the system. They are intended to broadly highlight the trade-offs and considerations facing the Committee should these risks eventuate.
The Committee noted that, in practice, a broad range of factors contribute to its monetary policy decisions. Its response to any of these risks would depend on economic conditions at the time, the outlook for inflationary pressure, and its secondary objectives of avoiding unnecessary instability in the economy and having regard to financial system stability.
The Committee voted to reduce the OCR to 3.25 percent
The Committee agreed on the projected central path for the OCR.
The Committee discussed the options of keeping the OCR on hold at 3.50 percent or reducing it to 3.25 percent. The case for lowering the OCR to 3.25 percent highlighted that CPI inflation is in the target range and there is significant spare capacity in the economy. Measures of core inflation and wage inflation have continued to decline. In addition, there is a weaker outlook for domestic activity and inflationary pressure relative to the February Statement, because of international developments. Some members also emphasised that non-tradable inflation was currently being boosted by administered prices. Given these factors, a 25 basis point decline in the OCR was seen as consistent with medium-term price stability.
In considering the merits of holding the OCR unchanged at 3.50 percent for this meeting, some members noted that this would allow the Committee to better assess whether increased economic policy uncertainty was having a noticeable impact on household and firm behaviour. An unchanged OCR could also further consolidate inflation expectations around the target mid-point, and guard against the risk of higher-than expected inflation from the supply-side effects of increased tariffs.
On Wednesday 28 May, the Committee took the decision to vote on the two options. By a majority of 5 votes to 1, the Committee agreed to decrease the OCR by 25 basis points from 3.50 percent to 3.25 percent.
Inflation is within the target band, and the Committee is well placed to respond to both domestic and international developments to maintain price stability over the medium term.
13 Comments
RBNZ sees two more cuts by March
By March...? 🤣
There will be two more cuts, but they will occur this year (2025)
Same game multi bet right there
Rural exports are currently running at historic highs.
The experts in rural say overseas production will not lift for a variety of reasons, climate programs in Europe and animal disease outbreaks in USA being two major ones.
The Reserve Bank today said the exact opposite.
If the rural experts are right there is a lot more money to flow into NZ over the next couple of years. Already farmer's indebtedness to the banks has shrunk significantly with the majority not needing working capital (overdrafts) and chunks coming off long term debt. Once farmers become more confident of their balance sheets spending will open up and demand will push up prices, at least in provincial NZ.
NZ Inc. has a MASSIVE problem with latent simmering stagflation. If the RBNZ ease too far prices will jump at the sniff of a recovery and if they don't we will further be strangled by low growth. If the RBNZ weren't reconfigured to a single mandate they could have looked through a bit of inflation and helped the economy but they aren't so we're in for a tough ride.
It does indeed. Dual mandate and ongoing inflation would have us moving in the direction to become New Zimbabwe as inflation simmers. A state just below boiling. How would tax payers support Govt Servants salaries, plus the unemployed and ever increasing retired...? Not through untaxed gains that's for sure. It would only be by punishing those that actually work.
Just let the asset bubble deflate, speed it up even. By reducing the burden of access to shelter the pressure will be reduced. Sure Banks make less money and some speculators don't make free capital gain. For the good of everyone else it seems an easy decision.
Well ironically debt principal repayments decline in real terms with high inflation so it would actually help the govt coffers!! That’s if the world continued to lend to us of course.
Can you prove these as factual statements?
The inflate away the debt theory I’m highly sceptical of.
In high inflation, interest rates also go higher, thus increasing interest expense and reducing people’s ability to pay debt principle repayments.
The government issues a 10 year bond say 1bio. If there was no inflation over 10 years they would have the equivalent of a 1bio payment. If there was 5% inflation a year the notional payment would be 1bio but in the absence of any other growth ( assume both scenarios) nominal GDP would have grown by about 60%. Therefore assuming their tax receipts improve by a similar amount nominally the relative cost of payment is roughly that 60% less.
But you’ve said inflation has increased so interest rates have as well so future interest expense has increased on new debt that is issued (eg see what has happened in the US in recent years and their spike in interest expense). And by how much has national debt (or private debt) increased to stimulate GDP by 60% over those 10 years and how much does that additional debt cost when services ar higher interest rates in the higher inflation environment?
I personally don’t buy the free lunch argument of higher inflation improving debt servicing. Someone pays the costs for it in a closed loop system eventually.
Agreed. Buts a socialize the loss and privatize the profit position for debt speculators. Hence they are in favor.
I wasn’t really commenting on future decisions regarding what happens to new borrowing just that existing debt gets eroded by inflation. And we are talking about the principal not the interest payments which are set when the treasury issues fixed rate bonds ( the interest payments obviously have a similar declining value as inflation compounds over time) so in terms of the principal: Wealth is eroded by inflation and debt is negative wealth. So the negative wealth getting eroded means it moves towards zero which is beneficial. You originally asked me how inflation erodes debt away not about future policy.
Given the lack of economic activity and the unwillingness of consumers to open their wallets the RB are moving too slowly IMO.
A 50 point cut should now be on the table.
We are only a few years through the current cycle, we will wither continue to see higher unemployment for a brief time, then slowly start seeing things improve likely early-mid 2026 and following to 2027 again. Given the impact of OCR cuts take around 2 years n full to play out, they have already over cooked it 2020 then undercooked the hikes for a time, followed by huge catch-up hikes to try and rectify their complacency. We can't keep lowering the OCR to stimulate an economy saddled with high private debt, as it is the private debt level that is the problem to begin with. About time to sit now and wait out the next 6months to see how the impact of previous drops plays out as mortgages roll over, and get some govt spending in place into infrastructure pronto to slow the decline and start the incline economically.
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