Monetary policy review

OCR down to 3%, more cuts to come

20 Aug 2025

Gareth Kiernan

Our take on the latest Monetary policy review (Wed 20 Aug 2025)

OCR cut by 25bp to 3%

Two members voted for a 50bp cut

OCR likely to reach 2.5% by end of 2025

The key numbers...

The Reserve Bank’s decision today to cut the official cash rate (OCR) by 25 basis points was in line with market expectations. However, the path to that decision was altogether more surprising, with two of the Monetary Policy Committee’s six members voting in favour of a 50-point cut instead.
The Committee stated that if “medium-term inflation pressures continue to ease as expected, there is scope to lower the OCR further.” With the Bank’s OCR projections now bottoming out 30 basis points lower than previously forecast, at 2.55% in March 2026, there is little doubt about another cut before the end of this year.
The Committee has been spooked by the weaker global growth outlook, particularly in China, as well as an estimated 0.3% contraction in New Zealand’s GDP in the June quarter – a weaker result than we and most other forecasters currently have pencilled in. The Bank noted concerns about “slow growth in parts of the economy that are most sensitive to interest rates”, including residential construction, house prices, and retail activity.
The Bank expects quarterly GDP growth to accelerate to 0.8% in December, which is above potential, and will therefore start to reduce spare capacity in the economy. This pick-up reflects the effects of previous official cash rate reductions filtering through into economic activity, particularly via refixing of mortgages at lower rates, as well as stronger spending in rural areas.
The Bank forecasts inflation to reach 3.0%pa in the current quarter, before easing back to 2.3%pa in early 2026. Although this track is slightly higher the 2.7%pa peak previously predicted, the Bank believes that “significant spare capacity continues to reduce domestic price pressures”, a near-term inflation assessment that we agree with.
The Bank is still keeping a watchful eye on inflation, stating that there was a “material possibility that it rises above the target band”, but that the “period in which this is most likely to occur is too soon for monetary policy to have any meaningful effect”, consistent with the expectation that this inflationary pressure is short-lived.

The OCR is headed lower

RBNZ official cash rate forecasts, quarterly averages

...and our reaction

The switch from “no change” at July’s Monetary Policy Review to the possibility of a 50-point cut at today’s meeting was surprising for how far things have swung around, and it possibly reflects elevated levels of uncertainty hanging over the economy at the moment. Based on the balance of risks revealed by today’s vote, Infometrics now forecasts two further cuts to the OCR, in both October and November, taking the OCR to a low of 2.5%.
If economic growth has started to accelerate more consistently before the end of the year, but the Reserve Bank is still cutting the OCR, there is a sizeable risk that these late-cycle rate cuts overstimulate the economy by the end of 2026. The Bank has at times displayed limited ability to be forward looking when setting monetary policy over recent years, and it again risks setting interest rates based too much on current conditions.
As a result, if the OCR goes to 2.5% by the end of this year, we caution that the Bank is likely to need to be lifting interest rates again in late 2026 to re-establish interest rates at a more “normal” or neutral level over the medium term.

Latest updates

Premium

Monetary policy review

OCR down to 3%, more cuts to come

The key numbers...

The OCR is headed lower

...and our reaction

Latest updates

OCR on hold, but set to lift slightly quicker

OCR cut to 2.25% looks like the last

OCR down to 2.5% as RBNZ cuts big