Seventh rate cut not feeling like a stairway to heaven

Wednesday, 20 August 2025

The Reserve Bank will release its monetary policy decision at 2pm and hold a conference at 3pm to field questions.

ANALYSIS: Assuming the Reserve Bank does what’s expected and cuts the official cash rate by 25 basis points to 3% this afternoon, it will be the seventh rate cut since the OCR peaked at 5.5% just over a year ago.

But this cut may feel a little bit different from the others.

Each previous rate reduction has been a celebration of falling inflation and supposed steps on the way to the much anticipated recovery.

But today’s monetary policy decision will be released against the backdrop of both a slightly troubling blip in annual inflation, which climbed to 2.7% in the June quarter, and a marked stunting of “green shoots”.

The talk is now of whether the Reserve Bank should be actively stimulating the economy to pull it out of the doldrums.

ANZ chief economist Sharon Zollner has said the economy looks like it could do with more support while Kiwibank has said the “weakness in the economy demands stimulus”.

Another difference is the cut could take the “real” OCR — in other words the interest rate adjusted for inflation — into negative territory for the first time in almost two years.

It has looked touch-and-go for a while whether inflation will hit 3% in the current quarter.

We won’t find out whether it has or not until Stats NZ releases that figure on October 20.

Brad Olsen tells Sam Hayes the Reserve Bank paused interest rate cuts due to lingering inflation concerns. But further cuts are likely this year, giving hope to Kiwis doing it tough.

But Westpac senior economist Satish Ranchhod warned last week, on the back of strong monthly price rises for food, electricity and airfares, there was a chance it could breach 3%.

It is also unclear how much of a feel-good factor today’s assumed cut could be expected to generate.

House prices and business investment have stubbornly failed to get much of a lift from previous rate cuts so far.

While that’s positive for home buyers, the narrative that rate cuts, tax cuts, a tight rein on government spending and a war on “red tape” are enough in themselves to turn the economic tide may be wearing thin for many.

If looser monetary policy fails to deliver soon, the Government has two choices; find someone else to blame, or remind Kiwis that it doesn’t have as much control over the economy as politicians of all shades normally tend to make out.

There may still be a small niggle of doubt that the Reserve Bank will in fact cut today.

Westpac chief economist Kelly Eckhold argues there’s “a decent case” for the central bank to keep the OCR on hold at 3.25% and see how the economy progresses over the rest of the year, given the lags inherent in monetary policy and the slight heat in inflation.

That is especially given the coalition Government changed the Reserve Bank’s mandate soon after it came to power to give it a sole focus on inflation.

But, to be clear, Eckhold still expects a cut.

It may be the final proof that the change of mandate hasn’t made much of a difference to monetary policy decisions, as former governor Adrian Orr had suggested it wouldn’t.