With the latest annual inflation rate softer than they expected, economists see the way cleared for another Official Cash Rate cut by the Reserve Bank in August

With the latest annual inflation rate a touch below what economists had forecasted, this paves the way for the Reserve Bank of New Zealand (RBNZ) to make a cut to the Official Cash Rate (OCR) in August - and possibly a further cut as soon as October as well. 

As of July, the Official Cash Rate (OCR) is sitting at 3.25% with the RBNZ 'pausing' on July 9 after six consecutive cuts from August 2024, taking the OCR down from the cycle high of 5.5%.

The RBNZ's policymakers still see scope to cut the OCR below the current 3.25%, as long as underlying inflation continues to cool. The next OCR review is on August 20 - and after that there's another review on October 8 before the final review for the year on November 26.

After Statistic New Zealand’s Consumers Price Index (CPI) announcement on Monday, economists agreed the annual inflation rate was softer than their expectations.

Economists at the country's largest bank ANZ have previously pencilled in OCR cuts for August, November and February.

"But today's [inflation] data suggest the easing we've long been expecting could arrive a little more quickly," ANZ senior economist Miles Workman says. 

"We have long been expecting the RBNZ will need to cut the OCR more than they have recently been signalling, and with today's data not the roadblock we thought it was going to be, the risk of a follow-up cut in October is now looking higher."

Labour market data due for release on August 6 will be important, Workman says. 

Head of research at BNZ Stephen Toplis says "we headed into today's announcement with the view it would be highly unlikely we would change our expectation that rates would fall in August but we were worried that a strong CPI might call into question our expectation for a further rate cut thereafter". 

It did the opposite, Toplis says. 

'Rate cuts in both August and October'

"So, for now, at least, we will stick with our expectation of rate cuts in both August and October."

Toplis says it looks less likely that annual inflation will push through 3% - and less likely it will stay there. 

"Were it to do so this could well push inflation expectations higher and have the RBNZ having to defend inflation moving outside of its target range."

In its Quickviews newsletter, the New Zealand Institute of Economic Research (NZIER) says "the continued easing in non-tradable inflation indicates soft demand in the New Zealand economy is continuing to weigh on pricing pressures, which should provide the RBNZ with scope for another OCR cut".

NZIER continues to forecast one further OCR cut in August at 25 basis points (bps) - bringing the OCR to 3%. 

Infometrics chief forecaster Gareth Kiernan says "today's data is unlikely to change the Reserve Bank's thinking ahead of next month's Monetary Policy statement".

"We continue to expect the OCR to be cut to 3% in August, with little or no scope for further cuts after that." 

Kiernan says the labour market data could still affect next month's interest rate decision, as could other high-frequency data.

Westpac senior economist Satish Ranchhod says Monday’s result was on the low side of what the RBNZ had anticipated.

"Today’s result won’t have done much to change the RBNZ’s mind relative to the cautious easing bias it signalled at its recent policy review.

“We continue to expect another 25 bp cut in August,” Ranchhod says in Westpac’s First Impressions: NZ Consumers Price Index, June quarter 2025.

Westpac would be watching core inflation measures closely to see how strong the underlying trend in prices is, Ranchhod says.

“Looking through the normal quarter-to-quarter volatility in prices, core inflation remains contained in the RBNZ’s target band. However, it isn’t dropping like it did last year and remains a little above 2%.”

RBNZ continues to 'overcook'

Kiwibank senior economist Mary Jo Vergara says this is the first test for an August cash rate cut.

"Inflation will likely push further from here," she says.

"But more important to policy is underlying inflation, which remains within the RBNZ's target band.

"Spare capacity within the Kiwi economy is keeping downward pressure on domestically generated inflation."

Looking to 2026, Vergara says inflation is set to slow below the 2% mid-point of the RBNZ's 1% to 3% target band. 

"It's why we focus more on core ... Encouragingly, core inflation has been trending south since hitting the 6.7% peak at the end of 2022. At 2.7% (in the year to June 2025), core inflation remains within the RBNZ’s target band," Vergara says.

"Our forecast strips out the spikes and looks at slack in the economy. And there's a lot of slack, especially in the labour market. 

"Our best guess, incorporating the damage inflicted through the recession we’re still crawling out of, has inflation falling to 1.8% next year."  

"If realised, the RBNZ continues to overcook. And we continue to advocate a stimulatory setting of 2.5%," Vergara says.