RBNZ flags weaker demand, rates may fall further
Global tariffs and economic uncertainty are likely to dampen medium-term inflation in New Zealand, while slowing business investment and household spending, Reserve Bank chief economist Paul Conway (pictured) said.
“Headline inflation is expected to fall to around 2% by early 2026, with spare capacity and easing core inflation reinforcing this outlook,” Conway told BusinessNZ in a speech in Wellington.
At present, the economy remains supported by high export prices – particularly dairy and beef – and lower interest rates, he said.
Tariff impacts ripple into NZ economy
Conway noted that as a small, open economy, New Zealand is heavily exposed to global developments, especially major shifts in trade policy.
“Being tied in with the global economy helps us prosper,” he said. “It also means that when something big happens offshore, such as the imposition of tariffs, its ripple effects impact the New Zealand economy.”
The US has announced a new round of tariffs on trading partners, including a 10% levy on New Zealand exports, set to take effect from Aug. 1. These protectionist moves follow earlier tariff hikes on China, the EU, and Southeast Asia.
While tariffs may raise US inflation by disrupting supply chains, Conway said the main impact on New Zealand would be a decline in global demand, which would put downward pressure on both export volumes and import prices.
‘Wait and see’ behaviour curbing activity
Elevated global and domestic uncertainty is also delaying investment and spending, Conway warned.
“When businesses aren’t sure what’s coming, they hold off hiring and delay big investments. Households tend to respond to increased uncertainty by putting off big spends or job moves,” he said.
“There’s a whole lot of ‘wait and see’ going on out there right now.”
RBNZ’s internal modelling shows that this uncertainty could further suppress demand beyond the direct impacts of tariffs. New Zealand businesses are likely to experience softer export demand, while importers may benefit from lower prices.
Trade diversion may also provide marginal relief – some exporters could benefit from redirected demand as global buyers seek alternatives to high-tariff countries like China and Brazil.
Inflation easing, more OCR cuts possible
These global trends are already shaping monetary policy settings.
“On net, these developments are expected to slow New Zealand’s economic recovery over mid-2026 and reduce medium-term inflation pressures,” Conway said.
With inflation back within the target range, the Reserve Bank has already reduced the official cash rate from 5.5% to 3.25% since August 2024.
“As outlined in the July Monetary Policy Review, the committee sees scope to lower the OCR further if medium-term inflation pressures continue to ease as projected,” he said.
In May, RBNZ shaded its OCR forecast slightly lower to reflect the disinflationary impact of tariffs and global uncertainty, with further reassessment expected in upcoming meetings.
Access the full speech for more information.
Get the hottest and freshest mortgage news delivered right into your inbox. Subscribe now to our FREE daily newsletter
