Business survey could keep fading hopes for July rate cut on life support

Tuesday, 1 July 2025

Businesses are holding on hard to hopes of a continued economic recovery, with confidence that economic conditions will improve in the coming year at their highest in 10 years, according to a major business survey.

But the New Zealand Institute of Economic Research’s quarterly survey of business opinion (QSBO) also found optimism had yet to show through strongly in firms’ assessment of their current trading, posing a conundrum for forecasters.

ANZ senior economist Miles Workman said the survey showed the economy “sputtering”.

The Reserve Bank is due to reconsider interest rates next week and Workman said the QSBO should provide it with confidence there is “significant excess capacity out there that will keep underlying inflation contained”.

“It’s a very close-run thing after the ‘dovish’ QSBO, but on balance we think the Reserve Bank will keep the OCR unchanged at 3.25% next week,” ANZ’s chief economist, Sharon Zollner, said.

NZIER reported a net 27% of firms expected an improvement in economic conditions over the coming year, up from a net 23% when it released its last results three months ago.

That suggests concerns over the local impact of global headwinds such as threatened US “retaliatory” tariffs have not had a big hit on sentiment.

But firms were still experiencing weak demand when polled, with a net 23% reporting a decline in their own activity in the June quarter.

'The recovery has not so far lived up to expectations, but firms remain hopeful of an improvement in conditions over the coming months,' NZIER concluded.

It said it was an encouraging sign that a net 8% of firms expected to increase their investment in plant and machinery in the current year, possibly reflecting the Government's 'Investment Boost' Budget initiative.

But labour market conditions remain 'challenging', with a net 12% of businesses reporting they had cut jobs in the quarter and only a net 4% expecting to hire in the coming three months.

The survey results suggested inflation should be 'contained' with a big drop in the number of firms reporting higher costs and expecting to raise prices, NZIER said.

In part because of that, NZIER is continuing to forecast the Reserve Bank will cut the official cash rate (OCR) by 25 basis points when it issues its next monetary policy statement tomorrow week.

But it said it recognised the potential for a “pause”.

Bank economists have been continuing to walk back expectations of another rate cut coming so soon.

BNZ research head Stephen Toplis, who has often been one of the more dovish among forecasters, has yet to scrap its prediction for a rate cut next week, but said in advance of the release of the QSBO survey that it was increasingly likely the central bank would “stand pat”.

Markets were earlier this week pricing-in only about a 20% chance for a 25 basis point next week, he said.

“Our formal view is for a 25bp cut but we recognise that the odds of this are diminishing by the day,” he said on Monday, noting a short-term threat of higher inflation could become cemented into future expectations.

The QSBO was the “final piece of first-tier economic data” ahead of the Reserve Bank meeting, he said.

ASB chief economist Nick Tuffley last week changed ASB’s forecast to predict there would be only one more rate-cut this year, which it currently expects in August.

NZIER deputy chief executive Christina Leung said expectations for a cut next week were “starting to fade”, but the easing in cost and pricing indicators suggested by its survey did pave the way for a further cut, “whether it happens in July or later”.

Westpac senior economist Michael Gordon said the survey sent very mixed signals which were unclear in terms of the near-term outlook for GDP.

“Traditionally the past performance measure has had a closer correspondence with quarterly GDP growth, but it substantially missed the rebound in growth in the last two quarters,” he said.

“We recently revised down our June quarter GDP forecast to 0.3% growth, but we’ll take a closer look at what today’s figures imply.