The Reserve Bank, led by new interim Governor Christian Hawkesby, has cut the Official Cash Rate by 25 basis points but says the impact of increased tariffs on global inflation is unclear at this point.
The move – taking the Official Cash Rate (OCR) to 3.5% – was widely expectedand didn’t move financial markets.
The New Zealand dollar was unchanged at US55.5c in the minutes following the release.
The Reserve Bank of New Zealand has cut the Official Cash Rate by 25 basis points to 3.5%. Photo / Mark Mitchell
But economists interpreted the tone of the Monetary Policy Committee’s commentary as dovish, meaning it leans towards further cuts.
“Our view is that the balance of risks is tilted towards the RBNZ [Reserve Bank] needing to set the OCR at a stimulatory level,” said ASB chief economist Nick Tuffley.
“We see the neutral rate as being around 3%, hence our new OCR view of a 2.75% low.”
The base case was for a series of 25-basis-point cuts through to August.
But there was a risk that the RBNZ might need to cut rates more aggressively.
A 50-basis-point cut in May was possible “if the downside impacts from the tariff war on medium-term inflation crystallise”, he said.
“We could see scenarios in which the OCR ends the year even lower than 2.75% if all the downside risks to inflation (not just the trade war) crystallise.”
Kiwibank economists, who have previously argued for more stimulatory settings, called for the RBNZ to move quickly and bring the OCR down to 2.5% by the end of the year.
“The outlook for the global economy has dimmed significantly. And as a small, heavily trade-dependent economy, our forecast recovery hangs in the balance,” they said.
“The RBNZ will need to step in to shore up confidence and support activity.”
In its assessment of the tariff situation, the Monetary Policy Committee noted that several factors stemming from tariff increases could put upward pressure on global prices over the medium term.
“Prices will rise in tariff-imposing countries, reflecting the higher cost of imports,” the committee said.
“Increased trade protectionism and uncertainty will also lower the productive capacity of the global economy. The costs of trade could also rise as global supply chains adapt to increased trade restrictions and geoeconomic fragmentation.”
But several factors could offset the supply-side shock.
“For New Zealand, demand for our exports is likely to decrease, reflecting weaker activity in our trading partner economies, especially in Asia. Increased uncertainty around global trade policy will also weigh on investment and spending, as will declines in asset prices.”
Trade diversion effects could also lower the prices of New Zealand’s imports, as some global exports targeted by tariffs are redirected to our market, the committee said.
Lower global oil prices would also lower New Zealand’s import prices.
“Given the downside risks associated with the deteriorating outlook for global growth, the tone of the release was a bit more dovish than in February, unsurprisingly,” said ANZ chief economist Sharon Zollner.
“Downside risks to economic activity and medium-term inflation outlook were noted, and the RBNZ did not push back against market pricing that currently implies a strong risk that the OCR ends up lower than previously envisaged.”
But it remained “a very volatile and unpredictable situation”, she said.
“The RBNZ has, as expected, opted to wait and see, dialling down the certainty on where the OCR will go from here.”
For the property market and mortgage borrowers, “uncertainty” was also the buzzword, said CoreLogic NZ chief property economist Kelvin Davidson.
“New Zealand’s interest rate environment still has a ‘downward bias’ and it’ll be interesting to see what happens to mortgage rates in the coming weeks,” he said.
February’s Reserve Bank lending data showed that borrowers continued to hedge their bets, with floating debt still popular (41% of loans), but fixed terms of longer than 12 months were coming back into focus.
At 20% of activity in February, fixes of greater than 12 months were the most popular they have been since July last year.
“For now, tariff-uncertainty aside, our expectation is a subdued upturn for the property market in 2025, with sales volumes and house prices rising slowly,” he said.
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist and also presents and produces videos and podcasts. He joined the Herald in 2003.
