The Reserve Bank has left the Official Cash Rate (OCR) unchanged at 3.25%, but signalled that further cuts remain on the table if inflation pressures ease as projected.
The Monetary Policy Committee (MPC) says headline inflation is expected to rise toward the top of its 1 to 3% target band by mid-2025. However, with “spare productive capacity in the economy and declining domestic inflation pressures,” inflation is forecast to return to around 2% by early 2026.
“Elevated export prices and lower interest rates are supporting a recovery in the New Zealand economy,” the Committee says.
“However, heightened global policy uncertainty and tariffs are expected to reduce global economic growth.”
The Committee cited both domestic and international uncertainty as reasons for holding off on a cut this month.
“If medium-term inflation pressures continue to ease as projected, the Committee expects to lower the Official Cash Rate further,” it added.
Inflation to peak mid-year
Annual consumers price index inflation rose to 2.5% in the March 2025 quarter and is expected to climb further in Q2 and Q3.
The Committee says declining core inflation and spare capacity in the economy should see inflation return to the 2% midpoint by early 2026.
The outlook has evolved broadly in line with May projections, with strong export prices and lower mortgage rates supporting a gradual recovery.
However domestic consumption and investment “remains weak, reflecting heightened caution in the face of global policy shocks”, the Committee noted.
Global uncertainty and tariffs weigh on outlook
The Committee says global economic growth is likely to slow in the second half of 2025 due to increased trade protectionism. Fiscal expansion in the US, China and Europe may offset some downside risks, but uncertainty remains high.
While tariffs are seen as inflationary in the US, inflation forecasts for China and emerging Asia have been revised lower, partly due to stronger regional currencies.
ANZ expects August cut
In its Monetary Policy Review analysis, ANZ Bank says the Reserve Bank’s decision was expected and noted that “the RBNZ maintained its bias towards lowering the OCR while acknowledging both upside and downside risks to the inflation outlook”.
“The RBNZ robustly discussed a cut or a hold, but ultimately reached a consensus to pause,” ANZ says.
“Data before the next meeting would resolve some uncertainty on economic momentum and inflation persistence, as well as the global outlook.
“We continue to expect that the RBNZ will cut the OCR by 25bp at the next Monetary Policy Statement in August, with more easing to come after that as the risks tilt toward medium-term inflation being too low rather than too high,” ANZ added.
The May Monetary Policy Statement implied a cut in either July or August, and another 15bp of easing later in the year.
