There is now a "high bar" for lowering the OCR in July, economist says
ASB has announced a change to its OCR forecast and is now predicting a pause in July, followed by another cut in August.
In its latest Economic Weekly and OCR Forecast Note, ASB said the Reserve Bank of New Zealand (RBNZ) is “prepared to hunker down” and wait for clearer data, particularly around inflation expectations and the unresolved trade tensions between the US and China. While ASB still sees a trough OCR of 2.75% by the end of 2025, the exact timing of cuts is up for speculation.
Currently, ASB expects a 25bp cut to be delivered in the August MPS, and has pencilled in another 25bp cut in October to 2.75%.
ASB senior economist Mark Smith said there is now a “high bar” needed to push the OCR lower, particularly as the Reserve Bank signalled that the OCR is close to neutral settings in its May Monetary Policy Statement (MPS). However, a lot will depend on how the tariff ceasefire will play out – still a significant point of uncertainty.
“Globally, we’ve been seeing a bit more consolidation and calmness,” Smith told NZ Adviser.
“When the early tariff announcements were made in April, things were looking pretty grim. Now it’s not looking quite as bad, and we’re seeing more signs that the New Zealand economy is doing reasonably well. We’ll be watching the 90-day ceasefire for tariffs, which is due to run out from early July.”
ASB said the Reserve Bank is unlikely to act prematurely without knowing how those negotiations resolve, particularly with the US-China pause ending just days before the August MPS. If those trade talks collapse or stall, downside risks to global growth could intensify rapidly, putting the OCR back in play.
The increasingly erratic political backdrop can’t be ignored, either – most recently exemplified by the dramatic implosion of the “bromance” between US president Donald Trump and Elon Musk. ASB chief economist Nick Tuffley summed it up best: “You know it has got bad when you even have Kanye West trying to act as peacemaker.”
Still, even the absurdly funny has very real impacts – Tesla’s share price has tumbled, and US equity markets have taken a hit. For central banks, it’s a reminder that today’s “uncertainty” operates well outside the bounds of textbook economics.
“It also highlighted how the current president can bolster or bust the fortunes of people through the whims of his executive power,” Tuffley said.
The domestic picture
Domestically, ASB notes that the New Zealand economy is showing some resilience – but the risks are still finely balanced. Inflation is still hovering around the upper end of the RBNZ’s 1-3% target range, currently sitting at 2.5%. Smith said it was “risky to assume the upward impetus will fade” – another reason RBNZ may well put a pause on rate cuts in July.
“The inflation outlook will be a factor that RBNZ will be quite cautious about,” Smith said.
“It has also highlighted that there’s quite a lot of stimulus already in the pipeline. Average mortgage rates that were around 6% in March are likely to go to around 5% by the end of the year. I think RBNZ will want to stay for a while and see how things pan out.”
When it comes to further movement on mortgage rates, Smith said the shorter term fixed rates are more or less done at around 5% – unless we see a clear downturn.
Kiwibank economist Sabrina Delgado said a further 25 basis point cut is “baked into the cake”, and predicted a 60% chance of the RBNZ taking it a step further to 2.75%.
However, she added that “nothing is ruled out yet”, and the Reserve Bank is really taking it day by day.
“There’s still a lot of room for things to go south from here,” Delgado said on Kiwibank’s latest Markets, Mystics and Mayhem podcast.
“The key takeaway is that more rate relief is coming. We know that move to at least 3% is pretty much there, which wasn’t fully clear in the February MPS.”
Smith said that overall, a significant deterioration leading to swifter cuts is “the risk view, not the central view.”
“Markets and people in general do not like uncertainty, and we’ve had those in spades in the last couple of months,” he said.
“If those escalate again and remain that way, we will see the global economy weaken and the New Zealand economy follow suit. There is a lot of uncertainty at present, and the RBNZ will take it one meeting at a time.”
