Pressure is on the Reserve Bank to act more aggressively to cut official interest rates after key growth data showed the economy performed far worse than anyone predicted over the June quarter.
Stats NZ’s gross domestic product (GDP) data showed New Zealand’s economic growth stalled over the quarter with a 0.9% decline – against market expectations of a 0.4% fall and the Reserve Bank’s forecast of minus 0.3%.
The most pessimistic of bank forecasts was for a 0.5% contraction.
The data showed New Zealand was easily the worst performer over the quarter compared with the growth rates of several other countries.
Canada reported a 0.4% contraction, but most other countries reported mild increases, with the US coming out on top with a 0.8% GDP gain.
Stats NZ’s release sent key two-year swap rates down by 15 basis points (bps) to 2.68% – a three-and-a-half year low – and the New Zealand dollar down by about half a US cent to US59.15c.
Before the data, the market was pricing in two more cuts in the Official Cash Rate – to 2.5% by February 2026 – but some banks are now calling for a cut of 50bps at the Reserve Bank’s next opportunity less than a month away.
Overnight indexed swap rates (OIS) – which offer a live indication of where the markets expect the Official Cash Rate (OCR) to land – declined across the curve after the GDP release.
They now point to the OCR hitting 2.3% early next year, compared with 2.5% before the data.
BNZ head of research Stephen Toplis said it was sticking with its central view of two 25bps rate cuts, in October and November, for the time being.
“We want more information on likely growth prospects and inflation before making any shift,” Toplis said.
“Clearly if we are to shift, it will be towards a more dovish stance.
“Today’s data will be very unhelpful for those selling the message of a recovering economy.”
Kiwibank said the contraction showed the Reserve Bank was “behind the eight ball”.
The bank’s chief economist Jarrod Kerr called for a half-point cut at the central bank’s next opportunity on October 8.
“We were just climbing out of last year’s recession, but here we are moving backwards, once again,” Kerr said.
Kerr noted the decline was broad-based, with 10 of the 16 measured industries recording falls in output.
“The 0.9% contraction over the June quarter proves that once again the Reserve Bank finds itself playing catch-up to the deteriorating economy, rather than leading us out,” he said.
“But enough is enough. And where monetary policy settings are today are clearly not enough.”
At last August’s monetary policy committee meeting, the Reserve Bank’s (RBNZ) decision came down to a historic four-two split, with two members favouring a 50bps cut.
The data also convinced Westpac economists to do an about-face on where they expect rates to go from here.
Westpac chief economist Kelly Eckhold said it now thinks the RBNZ will cut 50bps in October and 25bps in November (previously the bank expected 25bps cuts at both of those meetings).
“The cut in October seems a high probability, November is likely but more uncertain.”
The Quarterly Survey of Business Opinion (QSBO) on October 7 could shift the balance of probabilities back to a 25bps cut in October, “but it would need to be very strong”, Eckhold said.
ASB economists are also now calling for a 50bps cut next month.
“After disentangling the data, we have adjudged the amount of spare capacity in the economy to be significantly larger than the Reserve Bank assumed during the August monetary policy statement,” they said.
“We deem this to be a larger deflationary impulse than previously assumed.
“With New Zealand lacking economic tailwinds, the onus falls on the OCR to support the economy.
“We are now calling a 50bps cut in October, with a 25bps cut in November to bring a 2.25% year-end OCR,” ASB said.
Stats NZ, in its release, said the quarterly decline was driven by manufacturing, down 3.5% and construction, down 1.8%.
Per capita GDP fell by 1.1% in the quarter.
The 0.9% fall followed a revised 1.2% rise in GDP in the March quarter.
For the June year, Stats NZ said, the decline in GDP was 1.1%.
“The 0.9% fall in economic activity in the June 2025 quarter was broad-based with falls in 10 out of 16 industries,” Stats NZ economic growth spokesman Jason Attewell said.
GDP has now fallen in three of the past five quarters.
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.