Central bank on hold as recovery gains traction
The Reserve Bank is expected to delay its next rate cut until August, as early signs of economic recovery and lingering inflation concerns keep policymakers in watch-and-wait mode.
OCR lowered to 3.25%, but July cut unlikely
RBNZ reduced the official cash rate by 25 basis points to 3.25% at its May meeting, bringing the total easing this cycle to 225bps. It also revised its expected OCR floor down to 2.85%, citing a weaker global outlook.
What surprised markets was that, for only the second time since the Monetary Policy Committee’s inception, the decision to cut was not unanimous.
One member voted to hold the OCR steady, citing uncertainty around the global economy and inflation expectations. Governor Hawkesby confirmed the committee would approach the July 9 meeting with no preset bias.
“Given the RBNZ’s commentary, we have pushed out the timing of our forecast final OCR cut to the August MPS meeting,” said Darren Gibbs (pictured), senior economist at Westpac. “This will allow the RBNZ to see June quarter CPI inflation and labour market data before deciding whether to lower the OCR further.”
Budget 2025 fiscally cautious, no OCR impact
Budget 2025 was broadly neutral, with no major macro surprises. Its centrepiece, the Investment Boost initiative, allows accelerated depreciation for new business assets – welcome news for smaller firms.
New policy spending was cut to the lowest level in a decade, while changes to pay equity legislation are expected to save around $13 billion over the forecast period. The budget had no material impact on the RBNZ’s May decision.
GDP forecast upgraded as recovery broadens
“What we found encouraging in the sectoral data was the breadth of the upturn,” said Westpac Senior Economist Michael Gordon. “That suggests there isn’t one single thing driving the recovery, but a range of factors working together.”
Gordon noted that easing interest rates, improving fortunes in the primary sector, and ongoing international tourism recovery were all contributing.
“New Zealand’s easing cycle is further advanced than most other developed economies, and that interest rate relief is gradually working its way through,” he said.
Soft spots remain in data and sentiment
Despite signs of recovery, recent indicators remain mixed. The manufacturing PMI fell sharply to 47.5 in May, and retail card spending dropped 0.2%. Net migration estimates were also revised down by 5,000.
“Even though we seem set to have seen two quarters of trend to above-trend growth, it may be unwise to extrapolate that performance too far,” Gordon said. “Time will tell.”
Rural regions outperform as urban centres lag
Economic performance remains uneven across the country. Rural and tourism-heavy regions are showing firmer growth, while urban areas – particularly Wellington – remain subdued.
High commodity prices are supporting farm incomes, with sectors like dairy, meat, and kiwifruit performing strongly. Bank data also shows deposit growth in the primary sector has rebounded following earlier price weakness.
Housing, retail conditions still restrained
April home sales rose around 10% year-on-year (seasonally adjusted), but prices remain flat due to high listing volumes. The REINZ house price index was still down 0.3% year-on-year in April.
Retail spending has also been soft, showing little nominal growth despite lower petrol prices and mortgage rate relief expected to flow through later in 2025.
Outlook: inflation the key risk
RBNZ remains alert to inflation expectations, particularly in non-tradables like rates and utilities. Government-influenced price increases and earlier NZ dollar weakness are adding to cost pressures.
“Given the proximity of the pandemic inflation shock, the RBNZ needs to be alert to the possibility that broad-based inflation pressures could quickly re-emerge,” Gibbs said.
For further insights, see Westpac’s reports: Westpac Market Outlook and Westpac Australia & New Zealand Weekly.
