The Reserve Bank has cut the Official Cash Rate (OCR) by 25 basis points to 3%, citing subdued economic activity and easing inflation pressures, but warning the outlook remains finely balanced.
The Monetary Policy Committee (MPC) said inflation is currently sitting near the top of its 1 to 3% target band, with annual consumers price index (CPI) inflation reaching 2.7% in the June quarter and expected to touch 3% in September. Despite this near-term pressure, headline inflation is forecast to return to the 2% target midpoint by mid-2026.
Stalled recovery
New Zealand’s economy contracted in the second quarter of 2025, with spending by households and businesses constrained by falling employment, weaker house prices, and higher costs for essentials such as food, electricity and rates. The MPC noted household savings buffers have been eroded since 2022, while declining wages and rising living costs have weighed on consumer confidence.
House prices have fallen into what the Reserve Bank describes as its “sustainable” range, further dampening household wealth and consumption. Residential construction remains subdued, while growth in interest-sensitive sectors such as retail has yet to materially recover.
The Committee said there remains significant spare capacity in the economy, with unemployment and underutilisation rising and firms reporting low capacity use. Business lending growth has also been weak.
Global uncertainty
Internationally, trade restrictions and tariff disputes are reshaping trading patterns but have so far had limited impact on New Zealand’s import and export prices. However, the MPC warned that the effective tariff rate on New Zealand exports to the US is now higher than anticipated, creating tougher conditions for some exporters.
While growth in China exceeded expectations in the June quarter, it is forecast to moderate. Inflation is declining across most Asian trading partners but remains elevated in some advanced economies.
Balancing risks
The MPC considered options of holding the OCR at 3.25%, cutting by 25 basis points, or delivering a larger 50-point reduction. By a 4–2 majority, the committee voted for the 25-point cut, describing it as a balanced response to both upside and downside risks.
On the one hand, household and business caution could prolong weakness in spending and investment. On the other, lower mortgage rates and reduced debt servicing costs from past OCR reductions may yet accelerate the recovery.
“Financial conditions are continuing to respond to past reductions in the OCR,” the Committee noted, adding that further cuts may be possible if medium-term inflation pressures continue to ease.
