Confidence in spare capacity
The Reserve Bank (RBNZ) has cut the official cash rate (OCR) by 25bps to 3%, but economists say the central bank is now signalling deeper cuts ahead.
ASB chief economist Nick Tuffley (pictured above left) said the tone marked a clear shift.
“We saw in the preceding decisions a degree of angst about the implications from the current spike in inflation for keeping a lid on inflation over the medium term,” Tuffley said. “That caution has been cast aside to a large extent, as the RBNZ seems more confident that spare capacity – including unemployed seeking work – will take care of any lingering inflation impacts.”
He added that the RBNZ has sharply downgraded its 2025 growth outlook.
“We do think the RBNZ will follow through and cut the OCR by 25bp in both October and November,” Tuffley said.
MPC split highlights change in direction
The OCR cut was widely expected, but the policy debate revealed the committee was considering a larger move.
“The final policy debate came down to a formal vote between cutting by 25bp and cutting by 50bp, with 4:2 in favour of the smaller cut,” Tuffley said. “That the MPC seriously considered a 50bp cut tells you most of what you need to know: the skew of risks the RBNZ is focusing on has shifted considerably over the past few months.”
Despite one member emphasising caution, the central bank revised its Q2 GDP forecast sharply lower to -0.3% qoq.
“For what it’s worth, we are expecting a 0.1% increase, and a more gradual rebound,” Tuffley said. “But the implications from our forecasts are similar: there’s a lot of spare capacity that will take some time to get fully utilized.”
Domestic demand still sluggish
Tuffley noted that domestic demand has remained weak despite falling mortgage rates.
“As we outlined last week, domestic demand has remained sluggish even though interest rates have been falling for some time. Fiscal policy is unlikely to ride to the demand rescue as the government continues to eye up the structural deficit left by the COVID period,” he said.
Kiwibank sees stimulus shift
Kiwibank chief economist Jarrod Kerr (pictured above right) also welcomed the more dovish tone.
“The star of the show: the Reserve Bank’s August MPS. After pausing in July, the RBNZ cut the cash rate a further 25bps to 3% last week. But more importantly, the RBNZ signalled further cuts to come,” Kerr said.
He noted the 4:2 vote showed a historic shift in sentiment.
“The statement, the vote, and the forecasts were clearly (appropriately) dovish,” Kerr said. “The OCR track was lowered a massive 30 points from a bottom of 2.85% to 2.55% in March 2026. What does that mean? This is important. The RBNZ has gone from signalling a 60% chance of one last 25bps move to 2.75% at the May MPS, to now an 80% chance of a cut to 2.5%.”
He said the shift was overdue but still positive.
“The central bank we saw last week was one almost completely different from the one we saw in May,” Kerr said. “And while it’s great to see the RBNZ move towards a stimulatory interest rate setting, … it would have been better delivered three months ago.
“Still, the move is good news for Kiwi households and businesses. Interest rates are moving from providing relief to generating stimulus. Just what the economy needs.”
Westpac: more cuts likely
Westpac senior economist Satish Ranchhod (pictured below) also expects the OCR to fall to 2.5% by November.
“As we had expected, the RBNZ cut the official cash rate 25bps to 3.00% at its August policy meeting. However, the MPC also made an unexpected and sizeable downward revision to its projections for the OCR over the coming year,” Ranchhod said.
“Given the RBNZ’s clear intent, we now expect two further rate cuts this year, which would take the OCR to 2.50% (previously we forecast 3% would be the low point). This is what it sounds like when doves fly.”
He said near-term inflation risks remain, but the RBNZ is focused on medium-term pressures.
“Near-term increases in inflation, especially those related to temporary supply disruptions or volatile categories, aren’t the focus for monetary policy,” Ranchhod said. “The RBNZ can’t offset a lift in food prices that’s already occurred. Instead, they are focused on whether inflation is likely to remain contained over the longer term.”
Mortgage and housing impacts
Ranchhod highlighted that fixed-term mortgage rates had already been moving lower ahead of the policy announcement.
“With big reductions in interest rates already and more to come, the current softness in house prices is likely to give way to a stronger period over the coming year,” he said.
Ranchhod also noted the OCR projection implies 25bp cuts at the October and November meetings, conditional on incoming data.
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