The Reserve Bank’s Monetary Policy Committee lowered the Official Cash Rate to 3.75% from 4.25% Wednesday in Wellington, as anticipated by all 23 economists in a Bloomberg survey. The RBNZ’s new forecasts show the average OCR falling to 3.45% in the second quarter. “If economic conditions continue to evolve as projected, the Committee has scope to lower the OCR further through 2025,” the RBNZ said.
The RBNZ’s new forecasts show inflation re-accelerating to 2.7% later this year, which may give policymakers reason to tone down their aggressive easing stance. The re-election of Donald Trump as US president and his threat of tariffs has also increased uncertainty over the global growth and inflation outlook. The New Zealand dollar fell after the decision to buy 56.85 US cents at 2:20 p.m. in Wellington. Yields on policy sensitive two-year bonds edged lower while stocks reversed losses.
Governor Adrian Orr will hold a press conference at 3 p.m. local time. The RBNZ’s forward guidance shows the average OCR falling to 3.14% by the end of the year, lower than the 3.55% it projected in its November policy statement. It forecasts the benchmark will drop to 3.1% in early 2026 and remain there over the forecast horizon.
Inflation Tamed
In its record of meeting, the policy committee said it expects inflation to remain around target sustainably, despite some volatility this year. “This provides the context and the confidence for the Committee to continue lowering the OCR, and at a faster pace than projected in November,” it said.
“A 3.75% cash rate remains well above estimates of neutral, which are close to 3%” said Jarrod Kerr, chief economist at Kiwibank in Auckland. “So interest rates remain at levels that restrain demand. And after a severe recession, it’s hard to justify.”
Lower borrowing costs will be welcomed by the center-right government, which is promising to restore economic growth as it eyes an election due in late 2026.
The RBNZ reiterated its expectation that the economy will recover modestly in 2025 after a contraction last year that saw gross domestic product shrink 2.1% in the six months through September. Annual growth will be 1.8% in the year through March 2026 after a 1.2% contraction in the year ending March 2025, the RBNZ’s new forecasts show.
“Lower interest rates will encourage spending, although elevated global economic uncertainty is expected to weigh on business investment decisions,” the RBNZ said. “Geopolitics, including uncertainty about trade barriers, is likely to weaken global growth.”
Aggressive Cuts
After starting its easing cycle in August, the RBNZ has been one of the most aggressive rate cutters among its peers, lowering the OCR by 175 points. By contrast, the Federal Reserve paused after 100 points of reductions in the final months of 2024, while the Reserve Bank of Australia only began to ease yesterday with a 25-point move and said it will take a cautious approach to further cuts.
The RBNZ’s updated forecasts show inflation at 2.4% in the first quarter from 2.2% at the end of last year, but after picking up mid-year it is seen slowing to 2.2% again by early 2026. The central bank aims for the 2% mid-point of its 1-3% target band.
“Inflation in New Zealand is expected to be volatile in the near term, due to a lower exchange rate and higher petrol prices,” the RBNZ said. “The net effect of future changes in trade policy on inflation in New Zealand is currently unclear. Nevertheless, the Committee is well placed to maintain price stability over the medium term.”