The Reserve Bank says it isn’t biased towards lowering the Official Cash Rate further after cutting it to 3.25% in a 5-1 vote on Wednesday

Is this the end of the interest rate easing cycle?

Reserve Bank (RBNZ) Governor Christian Hawkesby says policymakers are not necessarily leaning towards cutting the Official Cash Rate (OCR) further, after lowering it to 3.25% on Wednesday. 

RBNZ projections in the May Monetary Policy Statement show the benchmark interest rate could be reduced to 2.85% under its central economic forecast, but Hawkesby downplayed the likelihood of this happening.

“We also acknowledge that there is a high degree of uncertainty. That is just one central projection. There are many other paths the economy could take,” the Governor said.

“The confidence ranges around that central projection are wide enough for us to not have a bias either way in terms of what the next step is at the next meeting.”

The news surprised traders, who pushed two-year government bond yields up 15 basis points to 3.46%. The kiwi dollar also jumped half a percent before mostly easing back.

Dave McLiesh, managing director of digital savings platform Wedge Money, said the market was reacting to Hawkesby’s hawkish comments during the press conference.

“The Monetary Policy Committee (MPC) thinks they could very well be done cutting the Official Cash Rate for this cycle,” he said.

Central bankers always retain some level of optionality, but Hawkesby’s comments were amplified by the split committee decision. One member voted to hold the OCR at 3.5% to assess whether uncertainty was easing inflation pressures. The other five voted for the cut.

The only other split vote was in May 2023, when the committee disagreed about whether or not to take the final step up to 5.5%. Hawkesby said on Wednesday that it wasn’t uncommon to have a vote “at this point in the economic cycle”. 

“If you look at the last time we voted, it was two years ago, when the Official Cash Rate was near its peak. Turning points, or inflection points, are the times that we are more likely to vote than not,” he said. 

This suggests the committee felt it was at, or at least nearing, the end of the easing cycle. 

There was no discussion of a 50 basis-point move, which some economists had advocated for ahead of the decision. Hawkesby said traders shouldn’t assume interest rates will continue to fall.

“We’re in a good position such that we can respond to developments as they occur, as opposed to being pre-programmed or pre-set to make any particular move,” he said. 

This is despite the central bank’s forecast predicting slower economic growth than previously expected, with a weak recovery in the residential construction and retail sectors.

Floor for mortgage rates?

Stephen Toplis, head of research at BNZ, said this growth outlook was pessimistic and made it unlikely the OCR would be cut much further, unless downside risks materialised.

“Financial markets judged today’s statement as being hawkish relative to expectations and are in the midst of trying to price out any chance of the cash rate falling below 3.00%,” he said.

“Currently mortgage rates are priced off the expectation that the RBNZ would cut rates to near 2.75%. This is no longer the case.”

BNZ cut all its fixed home loan rates on Tuesday in anticipation of Wednesday’s decision, despite wholesale swap rates holding steady.

Karen Silk, an assistant RBNZ governor, said the May decision had already been “baked into mortgage rates” and that any further declines would come from competition between banks. 

She had expected fixed-term rates to settle between 5% and 5.5% at the end of this cycle, and they were already “slightly lower” than that.

"I think that does reflect the increased competition that we're seeing in the market, at the moment, in a low credit growth environment,” she said. 

But not everyone believes the easing cycle has ended. Sharon Zollner, chief economist at ANZ, said she still thinks the RBNZ has a couple more cuts up its sleeve.

“With the OCR now well off its peak and closer to neutral the RBNZ doesn’t need to pin its colours to any particular mast until the picture is clearer,” she said.  

“Yes, some measures of inflation expectations have lifted recently, but capacity indicators continue to indicate that the output gap is negative and the economy in a disinflationary state. If you’re winning the war, there’s no need to overreact to minor provocations."

Jarrod Kerr, chief economist at Kiwibank, also pushed back on the idea the central bank was signalling the end of the easing cycle.

“The RBNZ is signalling more rate cuts. That’s the key takeaway from the May MPS. The OCR track was lowered from a flat-lined bottom of 3.10% to a 2.85% bottom in March 2026”. 

“The fact [they] ‘voted’ 5-1, with one member voting for a pause to assess, throws some doubt on the timing of the next move, but not the direction.”