Monetary policy easing seen nearing its end, says NZIER
A majority of members on the NZIER Monetary Policy Shadow Board recommend the Reserve Bank (RBNZ) hold the official cash rate at 3.25% in its upcoming July review, citing conflicting inflation signals and global uncertainty.
“While activity remains soft in the New Zealand economy, there are both upside and downside risks to inflation in the near term,” said NZIER senior economist Ting Huang (pictured). “Several members viewed it appropriate for the RBNZ to pause cutting the OCR in July.”
The recommendation comes ahead of RBNZ’s July 9 policy decision – its first without former governor Adrian Orr – with markets assigning just a 10% chance of a cut this week. Pricing suggests a 65% chance of a cut by August, rising to 90% by October, with the OCR expected to drop slightly below 3% by the end of 2025.
Shadow Board expects rate to hold steady
Most Shadow Board members forecast the OCR to remain between 2.75% and 3.25% over the next year, reflecting a consensus that the current monetary policy easing cycle is drawing to a close.
“Several members saw little scope for further OCR cuts over the coming year,” Huang said, citing uncertainty around inflation and global developments. However, two members believe further cuts are still warranted to support recovery.
Diverging views highlight policy trade-offs
Stephen Toplis, BNZ head of research, said further easing “is probably needed” to close the output gap but acknowledged the RBNZ faces a challenge in cutting amid current market pricing and its May neutral stance.
Jarrod Kerr, chief economist at Kiwibank, argued that “the economy still needs support, especially in the interest rate sensitive parts.”
While inflation has ticked up, Kerr said the move “should prove temporary” and “a little more [easing] is required to reinforce a recovery.”
In contrast, Viv Hall, Victoria University of Wellington emeritus professor, said there is “no strong case” for immediate movement, citing “ongoing global uncertainty” and minimal downward pressure on inflation expectations.
Limited upside for further cuts
Dennis Wesselbaum, University of Otago associate professor, pointed to inflationary risks and recent labour market softness, concluding that “current conditions warrant a pause on further rate cuts.”
Kelly Eckhold, Westpac chief economist, echoed this sentiment, saying stronger commodity prices and low rates “will likely prove enduring” once global volatility eases.
Brooke Roberts, Sharesies co-founder, noted that although RBNZ may hold rates, a 25-point cut is still “possible” due to rising unemployment and weakening domestic demand.
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