Reserve Bank cuts official cash rate to 3%, signals more cuts likely
Wednesday, 20 August 2025
The Reserve Bank has cut the official cash rate by 25 basis points to the new rate of 3% and changed its forecasts to imply an assumption of two more cuts to come.
The decision of its monetary policy committee went to a vote, with two of its six members pushing for a deeper cut.
The committee discussed both keeping the OCR on hold at 3.25%, and cutting more deeply to 2.75%, but it was the options of a 25bp cut or a 50bp cut that went to a vote.
Governor Christian Hawkesby said the bank had never been split four-two before, but there was “a strong consensus around the central path for the OCR”.
Today’s cut had been expected by financial markets, but the central bank’s future forecasts are more dovish than expected.
It is now forecasting the OCR will bottom out at 2.5% around the year’s end. It had previously only been signalling the possibility of one more further cut.
Financial markets reacted decisively to the change of tone by the bank, sending the New Zealand dollar down by more than half a US cent in the wake of the decision.
The additional monetary loosening came despite a new assessment from the Reserve Bank that inflation would reach 3% in the three months to the end of September, before reducing, and it warning of a “material possibility that it rises above the target band”.
Hawkesby told reporters there was a “50:50” chance of the latter occurring, but emphasised the decision it made today could have little influence on inflation this quarter and that its focus was on where it sat over the medium term.
The bank had previously forecast that inflation would peak at 2.7% in the quarter.
Hawkesby forecast spare capacity in the economy and declining domestic inflation would likely see headline inflation return to about 2% mid next year.
The economic recovery “stalled” in the second quarter, he said.
The bank noted in the record of its meeting that economic indicators were also weaker than it had expected when it issued its last monetary policy statement in May.
But it expected the economy would return to growth in the current quarter, “consistent with a recovery in some economic indicators for July”.
Capital Economics economist Abhijit Surya said it was “more confident than ever” in its own forecast that the OCR would drop to a low of 2.5%.
BNZ research head Stephen Toplis described the monetary policy statement as “very dovish”.
“The fact that two of the six members voted for a 50 point cut came as a real surprise,” he said. He noted there had been a five-two split over a vote in May 2023.
“We maintain our view that a further 25 point reduction will be delivered in October. We now add to that an expectation of a final 25 point cut at the November statement taking the low in the cash rate track to 2.5%,” he said.
Hawkesby made clear the market response to the bank’s statement had been anticipated and was welcome, and that it added to the impact the 25bp point cut would have.
“It's a reaction we're comfortable with and a reaction that we anticipated given our actions,” he said.
“The ‘signalling power’ of the vote and of the OCR track means that actual conditions and markets can start moving for us in terms of providing that additional easing in monetary conditions.”