Reserve Bank cuts Official Cash Rate by 0.25%

Wednesday, 28 May 2025

Christopher Luxon and Nicola Willis credit their government’s fiscal restraint for lower inflation and falling interest rates, while also addressing local council costs and a possible Ukraine visit.

The Reserve Bank has cut the Official Cash Rate by 25 basis points, taking the key interest rate down to 3.25%.

Prime Minister Christopher Luxon said the cut was “very good news” and reflected the progress in restraining government spending and the effect that had had on inflation.

Finance Minister Nicola Willis said she was struck by the Reserve Bank’s statement about how much uncertainty it was seeing, globally.

Unusually, one member of the six-person monetary policy committee did not agree to the consensus, voting in favour of keeping the rate unchanged.

Reserve Bank governor Christian Hawkesby describes the bank’s decision to vote on the policy options as a sign its processes were healthy.

The bank’s monetary policy committee is charged with trying to reach a consensus, but governor Christian Hawkesby described its decision to instead vote on the options as a sign its processes were healthy.

The central bank has also updated its forecasts for where it expects the OCR to travel from here, suggesting it is more likely than it had previously expected to fall below 3%.

The bank noted Stats NZ reported annual inflation rising to 2.5% in the first quarter of the year and that inflation expectations had risen.

It is projecting inflation to increase to 2.7% in the third quarter of this year.

But it also observed “core inflation” was declining and said there was spare productive capacity in the economy.

“These conditions are consistent with inflation returning to the mid-point of the 1% to 3% target band over the medium term,” it said.

ASB has warned the Reserve Bank is having to “fly in the fog” because of increased uncertainty over the domestic and global economic outlook.

The Reserve Bank said tariffs and increased policy uncertainty overseas were expected to “moderate New Zealand’s economic recovery and reduce medium-term inflation pressures”.

“However, there remains considerable uncertainty around these judgements,” it said, with that appearing to be reflected in the one dissenting vote against a rate cut.

The Reserve Bank had forecast in February that the OCR would average 3.1% next year, while its new forecasts reduce that to 2.9%.

It is continuing to forecast official unemployment will peak at 5.2% in the first half of this year, but is now predicting it will stay above 5% for an extra six months, into next year.

The New Zealand dollar rose fractionally — about a fifth of a US cent — in the first couple of hours after the monetary policy statement, possibly reflecting surprise at the lack of unanimity in the monetary policy committee for the widely expected OCR cut.

Hawkesby appeared to suggest not too much could be read into that, saying it often took a bit of time for the bank’s decisions to be digested.

The Reserve Bank said the Government’s ‘Investment Boost’ Budget initiative — which accelerates the speed at which businesses can deduct spending on investments against their taxable profits — would increase investment activity.

“However, the inflationary consequences of this policy are assumed to be offset by an announced reduction in government spending,” it said.

Hawkesby said “unders and overs” in the Budget had “netted out” with it ultimately not having a major bearing on the OCR decision.

Willis indicated the bank’s comments on Investment Boost were an endorsement of the Government’s view on the effect of the policy.

ASB chief economist Nick Tuffley said the monetary policy statement was consistent with at least one further 25bp cut down the track.

“The Reserve Bank seems relaxed about the risks from the spike in inflation that will come through later this year,” he said.