RBNZ in a "difficult situation" as trade risks rise
ASB chief economist Nick Tuffley (pictured) said New Zealand’s central bank faces a complex environment following its May decision to cut the official cash rate (OCR) to 3.25%.
“At present, the RBNZ has to overlay highly uncertain trade war impacts on top of an economy that is in the early stages of coming out of recession, with plenty of spare capacity, but with higher near-term inflation,” Tuffley said.
“This is occurring at a time where monetary policy settings are being normalised, with the 3.25% OCR close to our neutral OCR estimates.”
Monetary policy “in the neutral zone”
Tuffley said the May OCR cut was “the best of a difficult situation,” noting that “monetary policy restraint was dialled back” while the RBNZ “signalled further cuts were possible.”
“With the OCR effectively in the neutral zone, a higher bar is needed to sanction further OCR adjustments. It is much easier to move interest rates towards neutral levels than to move away from them.”
In a separate report, Tuffley also highlighted the unusual split decision by the Monetary Policy Committee, with one member voting to keep the OCR on hold – a move that underscores the growing divergence of views as monetary policy nears a turning point.
“The MPC discussed both a 25bp cut and keeping the OCR on hold… the fact it went to a vote rather than consensus shows how finely balanced conditions are,” he said.
More cuts expected – but not in July
ASB forecasts two more OCR cuts – in August and October – but says a July cut is unlikely due to limited fresh data.
“A July OCR cut cannot be ruled out, but there is value in waiting,” Tuffley said. “The high starting point for inflation and inflation expectations suggests no imminent need for the OCR to move lower, absent of a large global downturn.”
“There is a case for holding OCR settings until more clarity emerges… It is difficult to know precisely when the OCR will be cut — future OCR decisions over 2025 are all effectively ‘live’.”
RBNZ governor Christian Hawkesby also noted that a July cut is “not a done deal,” and the bank has “no bias” on the direction of the next move.
Meanwhile, markets are closely watching upcoming inflation expectations data from the ANZ Business Outlook and NZIER’s QSBO, which could heavily influence the MPC’s next steps.
August and October cuts on the cards
ASB’s revised forecast is for RBNZ to cut the OCR by 25 basis points in August and again in October, bringing it to a trough of 2.75%.
“Our reassessment is that it would take a significant deterioration in key US trade negotiations or other strong evidence that NZ inflation is rapidly cooling for the RBNZ to follow through with a July OCR cut,” Tuffley said.
“We expect a 25bp cut to be delivered in the August MPS on August 20 (to 3.00% OCR). We have then pencilled in another 25bp cut in October (2.75% OCR) but acknowledge that the timing is fluid.”
Neutral rate outlook remains anchored
Tuffley said the neutral OCR is unlikely to rise meaningfully and could fall further if global pressures ease.
“A key judgement we have made is that the neutral OCR is unlikely to push significantly higher from our current circa 3.25% estimates,” he said. “If anything, the inflation premium that has pushed NZ yields higher could abate with time.
“If, however, inflation does not prove to be as transitory as we hope, the OCR endpoint is likely to be somewhat higher than 2.75%.”
