The Reserve Bank has lowered the Official Cash Rate (OCR) by 25 basis points to 3.5%, as global trade tensions cast a shadow over the country’s economic outlook.
The Monetary Policy Committee announced the move on Wednesday following its April meeting and it was widely anticipated by markets and clearly signalled in February.
The central bank cited spare productive capacity in the domestic economy, weakening global activity, and subdued inflationary pressure as key factors behind the decision.
Annual consumer price inflation remains near the mid-point of the Committee’s 1 to 3% target band.
“Firms’ inflation expectations and core inflation are consistent with inflation remaining at target over the medium term,” it says.
The Committee notes New Zealand’s economy has evolved largely in line with expectations since February. While high export prices and a lower exchange rate have supported the primary sector and overall growth, domestic demand remains weak.
“Household spending and residential investment have been weaker than expected,” the Committee says.
Adding to concerns is the recent escalation in global trade barriers, with new tariffs introduced in the United States and retaliatory measures from several major trading partners. The Committee warned these developments could weigh further on the global economy.
“On balance, these developments create downside risks to the outlook for economic activity and inflation in New Zealand,” the Committee says.
Still, the central bank is confident its current position allows room to respond as needed.
“Having consumer price inflation close to the middle of its target band puts the Committee in the best position to respond to developments. As the extent and effect of tariff policies become clearer, the Committee has scope to lower the OCR further as appropriate.”
Despite recent declines in interest rates and higher export earnings, the pace of economic growth is expected to remain modest, constrained by weak productivity and low net immigration.
The Committee acknowledged the complexity of the inflation outlook given the global context.
“The implications of increased tariffs for global and domestic inflation are more ambiguous,” it says, noting that rising import costs could be countered by softening global demand, lower oil prices, and shifts in supply chains.
While the full impact of the tariff hikes is still unfolding, the Committee noted “monetary policy cannot offset the long-term negative supply-side effects of higher barriers to international trade.”
With inflation stable and excess capacity still evident in the economy, the Committee says a further rate cut was warranted.
“The Committee agreed that a 25 basis point reduction in the OCR would be consistent with their mandate of maintaining low and stable inflation,” it says.
‘More dovish’
According to ANZ economists, the tone of the Reserve Bank was “a bit more dovish than in February,” reflecting growing concerns over the weakening global growth outlook.
While there have been some positive surprises in New Zealand’s economic data in recent weeks, underlying inflation pressures remain subdued. The recent NZIER Quarterly Survey of Business Opinion reinforced that domestic inflation is still muted.
The Reserve Bank noted that “having… inflation close to the middle of its target band puts the Committee in the best position to respond to developments.”
ANZ says the central bank had acknowledged downside risks to both economic activity and inflation over the medium term, and it had not challenged market expectations that rates may fall further than previously forecast.
“That is the way things are tilting currently, but it remains a very volatile and unpredictable situation,” ANZ says. “The RBNZ has, as expected, opted to ‘wait and see’, dialling down the certainty on where the OCR will go from here.”
