Rate cut on way ‒ but Reserve Bank ‘flying in the fog’

Monday, 26 May 2025

Reserve Bank Governor Christian Hawkesby will preside over a monetary policy statement for the first time on Wednesday.

Bank economists are confident the Reserve Bank will lower the official cash rate by 25 basis points to 3.25% on Wednesday.

But they are much less certain what the central bank will signal about the likelihood of further rate cuts down the track.

Christian Hawkesby will preside over the release of the monetary policy statement for the first time, following the still unexplained sudden departure of former governor Adrian Orr in March.

Kiwibank chief economist Jarrod Kerr believed the Reserve Bank should be cutting interest rates faster and was forecasting they would fall to a low of 2.5% in the current cycle.

“There’s no doubt the Reserve Bank should be aiming to stimulate, not restrict, the economy. It’s just an argument around how much support is needed,” he said.

The Reserve Bank has yet to meaningfully explain Orr’s departure, but it appears to have followed close on the heels of a meeting with Finance Minister Nicola Willis on bank capital rules.

“With all the risks offshore – think Trumpian tariffs –and the pain still felt onshore, there’s a good argument to be made for taking policy into stimulatory territory as soon as possible.”

But ANZ senior economist Miles Workman said the Reserve Bank would need to make some difficult judgment calls in setting out the expected track of the OCR.

“Where it gets messy is judgments about the global growth outlook and any impacts the monetary policy committee builds into its forecasts for commodity prices, investment and employment.”

Economic data was mixed, but the results of a Reserve Bank survey that showed inflation expectations were on the rise would be less easily dismissed, he said.

“We continue to forecast the Reserve Bank will ultimately deliver an OCR of 2.5% but we don’t expect them to signal such an outcome at this stage.”

ASB is tipping the OCR will fall to a low of 2.75%, but described the Reserve Bank as having to “fly in the fog”.

“The Reserve Bank doesn’t know what it doesn’t know, and no one knows what Trump’s next policy move is. We’d expect the Reserve Bank to be pretty frank about that,” it said.

“Our concern is that the few growth drivers we have in the economy lose steam before a kiwi-driven rebound can take place.”

Westpac chief economist Kelly Eckhold is advocating for the Reserve Bank to take stock after Wednesday’s assumed rate cut, and perhaps wait until August to decide whether more cuts are warranted.

“While there could be adverse outcomes that require a lot more easing, they remain just a possibility at this stage,” he said.