OCR call: Reserve Bank cuts Official Cash Rate by 25 basis points to 3.25%

The Reserve Bank has cut the Official Cash Rate by 25 basis points to 3.25%.

The move was widely expected by economists and had been priced in by financial markets.

“The New Zealand economy is recovering after a period of contraction. High commodity prices and lower interest rates are supporting overall economic activity,” the Reserve Bank (RBNZ) said.

But recent developments in the international economy were expected to reduce global economic growth, it said.

“Both tariffs and increased policy uncertainty overseas are expected to moderate New Zealand’s economic recovery and reduce medium-term inflation pressures. However, there remains considerable uncertainty around these judgements.”

The New Zealand dollar was unchanged in the minutes following the 2pm release, at US59.43c.

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The vote to reduce the Official Cash Rate (OCR) was not unanimous. An option to hold the rate at 3.5% was discussed by the committee.

“In considering the merits of holding the OCR unchanged at 3.5% for this meeting, some members noted that this would allow the committee to better assess whether increased economic policy uncertainty was having a noticeable impact on household and firm behaviour.”

The committee voted on the two options. By a majority of five votes to one, the committee agreed to decrease the OCR by 25 basis points.

Hawkesby faces a difficult balancing act with US trade policy creating a great deal of uncertainty about the economic outlook.

Lower global growth projections, based on trade disruptions, have raised expectations that the RBNZ will have to cut the rate to a lower level than was forecast in February.

At the time, the RBNZ was projecting a pause at 3.25%, with the prospect of cutting to 3% by the end of the year.

Since then, commercial bank economists’ forecasts have shifted to a low point of 2.75% or 2.5% by the end of the year.

“We think the end point for the RBNZ’s OCR track will be lower relative to the February MPS [Monetary Policy Statement] – reflecting the risks to growth, but not by as much as market consensus,” ASB economist Wesley Tanuvasa said.

“We still think the RBNZ will need to provide modest policy support by way of a 2.75% year-end OCR. But it’s a highly uncertain and changeable environment, including for estimates of where the OCR ends up.”

Westpac chief economist Kelly Eckhold said he expected the RBNZ would still assess the economy as being on a “recovering trend”.

“However, it will probably view the recovery in domestic activity as somewhat weaker than hoped, but stronger than expected in externally focused sectors.”

Eckhold expected the RBNZ to present downside and upside scenarios.

Liam Dann is business editor-at-large for the NZ Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.