International uncertainty has prompted the Reserve Bank to leave its Official Cash Rate unchanged at 3.25%, but the bank has hinted heavily that it expects to resume rate cuts later in the year.
Market expectations were for the central bank to leave the Official Cash Rate (OCR) unchanged so that further data could be assessed, and that’s the way it panned out at today’s rate review.
The Reserve Bank (RBNZ) said consumer price inflation was likely to increase towards the top of the Monetary Policy Committee’s 1% to 3% target band over mid-2025.
However, with spare productive capacity in the economy and declining domestic inflation pressures, headline inflation was expected to remain in the band and return to around 2% by early 2026, it said.
Elevated export prices and lower interest rates were supporting a recovery in the New Zealand economy.
“However, heightened global policy uncertainty and tariffs are expected to reduce global economic growth,” the bank said.
“This will likely slow the pace of New Zealand’s economic recovery, reducing inflation pressures,” it said.
The Reserve Bank said the economic outlook remained “highly uncertain”, in part due to the impacts of international trade tariffs.
“If medium-term inflation pressures continue to ease as projected, the committee expects to lower the Official Cash Rate further,” it said.
Kiwibank chief economist Jarrod Kerr, who favoured a cut, said it was a “no fun” announcement from the Reserve Bank.
“I would have preferred for them to go today and get the job done, but they have decided to pause, which is fair enough,” he said.
“But the balance of risk is still to the downside.”
Kerr said the 225 pips of cuts already delivered by the bank were still feeding through.
The argument now is where the OCR will actually end up – 2.5% or 3%, he said.
“The good message is that rate relief has been provided ... We’re arguing that they need to provide more and some are arguing that they need to provide less.
“The main message is that rates have already fallen quite substantially and I think there’s still a little bit more to go.”
ANZ strategist David Croy said the Reserve Bank had given the market comfort that the broad easing agenda was intact, provided inflation goes back towards the target range later in the year.
Capital Economics said that at face value, the announcement implied a terminal rate of 2.75%, which was broadly in line with what markets were anticipating.
“However, we continue to believe that the bank is understating the downside risks to activity and inflation,” Capital Economics said.
“As a result, we’re sticking to our forecast that the RBNZ will eventually cut rates to a low of 2.5%,” the research firm said.
The decision follows the Reserve Bank of Australia’s (RBA) move on Tuesday to leave its cash rate target unchanged at 3.85%, despite market expectations of a cut.
Today’s pause followed six consecutive decisions of OCR cuts from the RBNZ.
“Yesterday’s RBA decision provided a timely reminder to markets of the benefit of waiting for clarity to emerge,” ASB economists said.
The record of the committee’s meeting showed the RBNZ’s on-hold decision was the consensus view, implying a unanimous vote.
However, a 25-basis-point (bps) cut was also considered, given concerns over the activity backdrop in recent months and over the potential for excess caution by households and businesses in the face of economic uncertainty.
The committee noted that mortgage and deposit interest rates have continued to decline, reflecting a lower OCR, strong bank liquidity and soft credit growth.
“The average interest rate on the stock of mortgages is expected to continue to decline in coming quarters as more mortgage holders refix at lower one- to two-year, fixed-term interest rates,” it said.
Close to half the stock of mortgages is due to reprice during the September and December 2025 quarters, the committee said.
Cotality chief property economist Kelvin Davidson said the housing market effects from today’s OCR decision were “likely to be negligible”.
“All in all, the second half of the year for NZ’s housing market may be just as subdued as the first,” he said.
Financial market reaction to the announcement was muted, with the two-year swap rate gaining 2bps to 3.25% and the 10-year rate rising 4bps to 4.17%.
The Kiwi dollar edged up 11 pips to US60.10c.
The overnight index swaps market pointed to 17bps of cuts by August, 33bps by November and 39bps by February (cumulatively).
Jamie Gray is an Auckland-based journalist, covering the financial markets, primary sector and energy. He joined the Herald in 2011.