Bank tips OCR to hit 3% by August
Westpac is now forecasting a deeper cut to the official cash rate, predicting it will fall to 3% by July or August, as global trade risks cloud New Zealand’s recovery.
Balancing recovery with global risks
Westpac chief economist Kelly Eckhold (pictured left) said the bank’s updated forecasts will account for both recent domestic data and the growing threat of global economic weakness.
“Next Tuesday we will be releasing updated economic forecasts in our May Economic Overview...,” Eckhold said. “It’s entirely unclear what state the global economy will be in three to six months from now and what that could mean here in New Zealand.”
“Some weakness in global trading partner growth looks inevitable but the extent of that weakness and the ultimate impact on New Zealand is totally up for grabs.”
While Westpac had previously forecast a trough at 3.25%, the possibility of a more extended slowdown has shifted its outlook.
“We have pencilled in an additional 25bp cut to 3% in July (noting that August is also a real possibility) to reflect that the RBNZ will likely continue to perceive downside risks for a while after May,” Eckhold said.
Interest rate cuts already boosting household incomes
With rates already lowered to 3.5% in April, many borrowers are beginning to feel the relief.
“In fact, for the average household with a mortgage, that fall in their minimum repayments would be equivalent to roughly 4% of their annual income,” Eckhold said. “That compares favourably with other periods of monetary easing in the last 30 years.”
He added that the stimulus hitting now is second only to the Global Financial Crisis in terms of impact.
Mixed domestic picture adds complexity
Westpac’s analysis showed that while business confidence and housing activity have improved, the recovery remains uneven. Labour market data was mixed, with steady unemployment but declining hours worked and cooling wage growth.
“The New Zealand economy continued its slow-but-steady recovery up until the trade shock hit,” Eckhold said.
External shocks pose the biggest threat
The most serious risk now lies in external trade uncertainty and global demand, Eckhold warned.
“Markets will remain alert for the potential that the uncertain operating environment is impinging on the nascent recovery in consumption and investment,” he said.
Inflation still elevated, but not enough to halt easing
Despite inflation remaining above target in key sectors, Eckhold said Westpac expects RBNZ, which recently warned of increased risk to the financial system, to continue cutting rates gradually—unless global data deteriorates more sharply.
“It’s by no means clear that the downside risks will eventuate, but we expect the RBNZ to continue to move methodically in the easing direction while those downside risks remain,” he said.
Tightening cycle pushed to 2026
Westpac, which recently projected a slight rise in borrowing as the government tightens spending, has also revised its longer-term outlook, now expecting the OCR to remain at its low point well into 2026 as global uncertainty persists and inflation pressures gradually ease.
“A move in the OCR to 3% now seems likely by August,” Eckhold said.
“Given a general election is likely in late 2026 it seems prudent to assume at this point the tightening cycle might begin at the end of 2026 as opposed to mid-2026 as previously assumed.”
