Reserve Bank delivers expected 0.25% OCR cut

Wednesday, 9 April 2025

The Reserve Bank has cut the official cash rate by 25 basis points to 3.5%, following a review led by its new temporary governor Christian Hawkesby.

The bank made reference to recent US and retaliatory tariffs in its statement, saying “recently announced increases in global trade barriers weaken the outlook for global economic activity”.

“On balance, these developments create downside risks to the outlook for economic activity and inflation in New Zealand,” it said.

The Reserve Bank said it had scope to lower the OCR further as appropriate “as the extent and effect of tariff policies become clearer”.

But the impact of increased tariffs on global inflation was unclear at this point, “particularly given the recency of the announcement and the possibility of further changes in global trade policy settings”, it said.

Future policy decisions would be determined by the outlook for inflationary pressure over the medium term, it said.

Economists had been expecting the rate cut, but the global market turmoil unleashed by United States tariffs has left them increasingly uncertain about when and at what level the OCR might bottom out.

Ahead of the Reserve Bank’s review, ANZ had been forecasting the cash rate would reach a low of 3% in the current economic cycle, while Westpac had been predicting a low of 3.25%.

But BNZ had been tipping the OCR to fall further to a ‘terminal level’ of 2.75%.

The Reserve Bank’s commentary prompted ASB to follow suit and tip the OCR would fall to a low 2.75%, a big drop from its previous 3.25% forecast.

“The balance of risks around the medium-term inflation outlook has tilted more noticeably down this week,” its chief economist Nick Tuffley said.

The Reserve Bank’s next monetary policy statement will be released on May 28, shortly after the Budget.

Banks quickly began reflecting the rate cut in their variable or “floating” lending rates, but it is not clear the cut will change the rates at which people can refix mortgages.

Finance Minister Nicola Willis noted the OCR had fallen by two percentage points over the past nine months and said the latest cut would stimulate economic activity, while noting it had been factored-into fixed-term retail interest rates ahead of it being confirmed.

In comments that may have provided reassurance to the Reserve Bank that it was safe to cut interest rates, Willis said yesterday that she still intended beating Treasury forecasts by returning the Government’s books to a form of surplus by the year ending June 2028.

That would be a year earlier than Treasury officials expect.

Labour finance spokesperson Barbara Edmonds accused Willis of “not being honest” with Kiwis about what a continued global slowdown could mean for the Budget, forecasting “more draconian cuts to public services”.

The Reserve Bank said several factors stemming from tariff increases could put upward pressure on global prices over the medium term.

“Prices will rise in tariff-imposing countries, reflecting the higher cost of imports. Increased trade protectionism and uncertainty will also lower the productive capacity of the global economy.”

The costs of trade could also rise as global supply chains adapted to increased trade restrictions and “geoeconomic fragmentation”, it said.

But the bank said there might be several offsetting factors.

“For New Zealand, demand for our exports is likely to decrease, reflecting weaker activity in our trading partner economies, especially in Asia.

“Increased uncertainty around global trade policy will also weigh on investment and spending, as will declines in asset prices,” it said.

“Trade diversion effects” could lower the prices of New Zealand’s imports, as some global exports targeted by tariffs were redirected here, it added.

“Lower global oil prices will also lower New Zealand import prices.”

Willis also said tariffs could unleash both inflationary and disinflationary forces.

“It's probably premature at the moment to try and determine precisely what the net impact of things will be on New Zealand,” she told Parliament.

However, she noted “the market has recently been expecting more OCR reductions than it was before the tariff announcements”.

Capital Economics economist Abhijit Surya interpreted the Reserve Bank’s commentary as “mildly dovish”.

He is continuing to forecast the OCR will drop right down to 2.5%.

“There was not unanimity around the impact of a global trade war on New Zealand”, with some members of the bank’s monetary policy committee arguing that risks to the inflation outlook “remain balanced at this stage”, he said.

That suggested the central bank would “probably continue to move in 25bp increments going forward”, he said.

“However, as ‘downside risks’ to inflation start to eventuate over the coming months, we still think there will be a compelling case for the bank to cut rates further than most are predicting.”

But the New Zealand dollar was trading unchanged at 55.3 US cents an hour after the Reserve Bank’s statement, suggesting traders did not see it carrying any unexpected tone.

ANZ chief economist Sharon Zollner said its take was that the Reserve Bank had “trod with a measured step”

CoreLogic chief property economist Kelvin Davidson said that for the property market and mortgage borrowers, ‘uncertainty’ was a buzzword.