Monetary policy review

OCR down to 2.5% as RBNZ cuts big

8 Oct 2025

Gareth Kiernan

Our take on the latest Monetary policy review (Wed 8 Oct 2025)

OCR cut by 50bp to 2.5%

Another 25-point cut likely in November

Is the Bank now risking overstimulating the economy?

The key numbers...

The Reserve Bank opted for a 50-point cut to the official cash rate (OCR) at today’s review. Financial markets had been fairly evenly split in their expectation of either a 25-point or 50-point cut, but the Monetary Policy Committee reached a consensus for the larger cut and did not take the decision to a vote.
The Bank’s decision for a larger cut reflected a view that the economy continues to operate with significant spare capacity, and that households and businesses might be acting with “excess precaution”. The move represents a clear effort from the Bank to try and boost confidence, and thus consumption, investment, employment, and economic activity, by now directly stimulating the economy.
Despite the spare capacity across the economy, the Bank was not totally swayed by the weak June quarter GDP result. As analysts including ourselves have noted, a significant contribution to the -0.9% result came from a large negative seasonal balancing item, which is expected to reverse out in coming quarters. Additionally, the Bank saw supply constraints due to unfavourable weather conditions for meat production and the effects of limited domestic energy sources on the manufacturing sector – factors all implying that the economy’s spare capacity is not as large as the headline GDP result would suggest at first glance.
The Bank also highlighted concerns about the possibility of slower global growth in 2026 as AI-related investment moderates. This risk comes on top of previous concerns about US tariffs and geopolitical uncertainty, and it occurs at the same time as some softening in global dairy and horticulture prices is emerging.

A big shift in interest rate expectations

Market pricing of OCR, by date of pricing

...and our reaction

Today’s larger cut by the Reserve Bank is consistent with the softer economic data following August’s review, when the Committee was divided between a 25-point and a 50-point cut. The larger cut also indicates that the Bank has lost patience with the economy’s failure to respond as expected to interest rate cuts over the last 14 months, and it represents the Bank’s best effort to provide a shot in the arm for consumer confidence and, by extension, spending activity.
The Committee stated that it “remains open to further reductions in the OCR as required for inflation to settle sustainably near the 2 percent target midpoint”. This statement points towards another cut, probably of 25 basis points, at the next Monetary Policy Statement on 26 November, with data before then unlikely to signal any significant improvement in economic outcomes.
Key to the Reserve Bank’s decision-making is its expectation that headline inflation moderates from an estimated 3.0%pa in the September quarter back towards 2%pa by mid-2026. Although most forecasts point towards this moderation occurring, near-term upside risks to inflation are posed by higher inflation expectations, supply constraints, or the lower exchange rate.
Although the domestic economic response to lower interest rates has been muted to date, we see an increasing risk that the Bank’s interest rate cuts this quarter will still be stimulating faster growth in late 2026, due to the usual lags in monetary policy, at a time when momentum in economic activity has already built back up. We expect the OCR to bottom out at 2.25%, with interest rates needing to start rising again before the end of next year.

Latest updates

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Monetary policy review

OCR down to 2.5% as RBNZ cuts big

The key numbers...

A big shift in interest rate expectations

...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 3%, more cuts to come