Monetary policy review

Reserve Bank cuts 50 again, strikes a dovish tone on the risks

19 Feb 2025

Gareth Kiernan

Our take on the latest Monetary policy review (Wed 19 Feb 2025)

OCR cut 50bp to 3.75%

Inflation forecast to rebound to 2.7%pa in Sep 2025

OCR likely to be cut to 3% this year

The key numbers...

The Reserve Bank cut the official cash rate (OCR) by a further 50 basis points today, taking it to 3.75%. The Bank’s OCR forecast track also shows the OCR bottoming out sooner, by early next year, at between 3% and 3.25%.
The Bank has adopted a relaxed position about the increase in inflationary concerns over the last six weeks. The Bank noted the effects of the lower exchange rate and higher oil prices on headline inflation, which have flowed through into an uptick in forecast inflation to 2.7%pa later this year, compared with 2.5%pa in the Bank’s November forecasts. However, the Bank stated that the “near-term increase in headline inflation is unlikely to significantly affect wage- and price-setting behaviour given excess capacity in the economy.”
The Bank has also downplayed recent improvements in some economic indicators, stating that “activity in New Zealand remains subdued” and that the “pace [of recovery this year] is expected to be modest, as potential GDP growth is constrained by ongoing weakness in productivity growth and lower net immigration.” The Bank’s forecasts see no more than 0.6% quarterly GDP growth throughout 2025.

Signalling a faster pace of cuts

Reserve Bank OCR forecasts, quarterly averages

...and our reaction

The Reserve Bank remains on track to cut the OCR to 3.25% by mid-2025, in line with our forecasts. However, the dovish statement suggests there is a chance of a further 50-point cut, rather than slowing the pace of easing as the OCR approaches neutral and the economy shows early signs of recovery.
Aside from the risk of another 50-point cut, we now also expect the Bank to cut the OCR to 3% in the September quarter this year. Today’s statement indicates the Bank is relaxed about what it expects to be a temporary lift in inflation due to the exchange rate and fuel prices. The Bank also does not see the acceleration in economic growth later this year as presenting any significant inflationary risks either.
At this stage, inflation expectations back up the Bank’s view, with most expectations measures moderating in the Bank’s latest Survey of Expectations published last week. However, inflation expectations could easily pick up later this year as headline inflation ticks up, at precisely the time that accelerating economic growth is starting to create more demand-side pressures.
We see a risk that the Bank is underplaying early signs of the economy’s turnaround, that it is underestimating the pace of the recovery during 2025, and that it is being overly relaxed about the build-up of inflationary pressures later this year. The effects of interest rate cuts to date will take another year to flow through the economy. We see a real chance that faster or more cuts by the Bank lead to another monetary policy overshoot, amplifying the economic cycle again, and necessitating another tightening cycle in 2026.
Long story short – the 50-point cut today was the right move, and the Bank’s forecast track for the OCR is now more consistent with market pricing. But the risk tone appears unbalanced, which could risk overcooking the monetary policy easing and create the need for renewed increases in interest rates in 2026. We think a more measured tone, and slower rate of easing, might be the path of least regret.

Latest updates

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Monetary policy review

Reserve Bank cuts 50 again, strikes a dovish tone on the risks

The key numbers...

Signalling a faster pace of cuts

...and our reaction

Latest updates

OCR up for first time in three years, as expected

Split decision keeps OCR at 2.25% for now

Reserve Bank holds at 2.25%, but watches vigilantly

OCR on hold, but set to lift slightly quicker