Monetary policy review

RBNZ votes to cut rates amid global uncertainty

28 May 2025

Gareth Kiernan

Our take on the latest Monetary policy review (Wed 28 May 2025)

OCR cut 25bp to 3.25%

Decision reached via a rare vote

Reserve Bank includes one additional cut in its OCR forecast track

The key numbers...

The Reserve Bank cut the official cash rate (OCR) by another 25 basis points as expected, to 3.25%. However, for the first time in two years (and only the second time since the Monetary Policy Committee was introduced in 2019), the decision was not reached by consensus, with one member voting to keep the OCR unchanged at 3.5%.
In cutting the OCR, the Bank emphasised declining core inflation, spare capacity in the economy, and the likelihood of a more moderate economic recovery due to tariffs and increased policy uncertainty overseas. Indeed, despite March quarter inflation coming in above expectations, the Bank’s predicted peak in inflation in the September 2025 quarter is unchanged at 2.7%pa, and inflation is forecast to slip just below 2%pa in the first half of 2026.
The Bank has reduced its forecast for economic growth in the March 2026 year from 1.8%pa to 1.5%pa. However, that lost ground is expected to be more than made up in subsequent quarters, with growth in the June 2027 year revised up from 2.4% to 2.9%pa. The weaker near-term outlook is mostly driven by global events, along with weaker-than-expected recoveries in areas such as residential construction and retail activity. The improved medium-term picture is underpinned by the “buoyant agricultural sector”.
The Bank’s OCR projections now include one additional rate cut by early 2026, with the OCR getting down to 2.85% (that is, in the 2.75-3.00% range) rather than the 3.10% (3.00-3.25%) shown in February’s forecasts. Despite the Committee’s vote between no change and a 25-point cut, it appears that the balance of risks around the OCR has shifted to the downside over the last three months – a conclusion that is consistent with the Bank’s statement at its April review.

More cuts might be more likely, as uncertainty delays the recovery

Comparison of the Reserve Bank's official cash rate forecasts

...and our reaction

The conflicting signals between the Bank’s OCR projections, which include an additional future cut, and the Committee’s vote, which saw one person vote to not cut today, demonstrate the high level of uncertainty faced by the Bank currently. Today’s statement provides limited additional clarity about the outlook for interest rates from here, and given uncertainty levels, it is appropriate for the Bank to keep its options open and respond to economic data and events as they unfold.
Demonstrating this uncertainty, alongside its central projection, the Reserve Bank also published forecast scenarios with reduced global supply or weaker global demand. Although both these scenarios result in weaker economic growth in New Zealand, they have very different inflationary outcomes and, therefore, implications for interest rates. The supply shock could push inflation up to 3.0%pa later this year and create more persistent inflationary pressures during 2026, whereas the demand shock could see inflation ease to 1.7%pa next year and remain below the midpoint of the target band through until 2028. These scenarios include OCR tracks up to 40 basis points higher or lower than the central scenario.
Inflation expectations are possibly the biggest impediment to further interest rate cuts, with some concern that the recent uptick in expectations could foreshadow “a more generalised and persistent increase in inflation expectations” and, by extension, business price-setting behaviour. To some degree, the Bank will be wary of assuming this year’s inflation pick-up will be temporary, given its experience of how badly it misread conditions as inflation was accelerating in 2021/22.
Given near-term inflation risks, we are unwilling to factor any additional interest rate cuts into our forecast outlook at this stage. We still expect the OCR to be cut to 3.0% in July, and we will continue to monitor economic data and international events in coming weeks, refining our forecasts as required. At this stage, we recognise the risks to our OCR forecasts probably lie to the downside.

Latest updates

Premium

Monetary policy review

RBNZ votes to cut rates amid global uncertainty

The key numbers...

More cuts might be more likely, as uncertainty delays the recovery

...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