Monetary policy review

Tariffs point towards further interest rate cuts

9 Apr 2025

Our take on the latest Monetary policy review (Wed 9 Apr 2025)

OCR cut 25bp to 3.5%

Tariffs present downside risks to NZ economic activity and inflation

Further OCR cuts could be appropriate

The Reserve Bank cut the official cash rate (OCR) by 25 basis points today, to 3.5% as expected. The Bank noted that “economic activity in New Zealand has evolved largely as expected” since February.
Unsurprisingly, much of the Bank’s Record of Meeting focused on the likely effects of tariffs on economic activity and inflation. The Bank determined that “recently announced increases in global trade barriers … create downside risks to the outlook for economic activity and inflation in New Zealand.”
The Monetary Policy Committee differentiated between the supply-side effects on inflation, such as higher prices for imports from tariff-imposing countries or disruptions to global supply chains, and demand-side effects on inflation, whereby weaker economic activity could lead to lower prices. The Bank “noted that monetary policy cannot offset the long-term negative supply-side effects of higher barriers to international trade”, implying that the Bank could put a lower weighting on or look past any inflationary pressures arising from the supply-side shock.
The Bank also said that “the full economic impact of cuts in the OCR since August 2024 are yet to be fully realised”, reinforcing that the stimulatory effects of previous easing will continue to flow into the economy via lower mortgage rates throughout this year.

OCR forecast market pricing by date

The Reserve Bank has had limited time to react to last week’s “Liberation Day” tariff announcements from the US, and today’s Monetary Policy Review has been conducted without an update of the Bank’s economic forecasts. In this regard, a 25-point cut is appropriate while the Bank more fully assesses the likely effects of the tariffs on inflation and other economic outcomes.
There appears to have been some disagreement among the Committee about the inflation implications of the tariff announcements. The Record of Meeting stated that “Most members of the Committee consider that recent global policy developments have shifted the balance of risk for New Zealand inflation lower over the medium term. Others note that, while uncertainty around the inflation outlook has increased, the risks remain balanced at this stage.”
However, amid this divergence in views, the Bank has opened the door to the OCR being cut to 3% or below in the second half of this year. The Bank stated that “as the extent and effect of tariff policies become clearer, the Committee has scope to lower the OCR further as appropriate.”
Prior to last week’s tariff announcement, we saw an emerging higher inflationary environment during 2025 reducing scope for the OCR to go below 3.25% this year. Now, the Bank’s current view clearly raises the chance of the OCR going lower. We are currently revisiting our OCR projections and will publish updated economic forecasts on Thursday 17 April.

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