Reserve Bank cuts official cash rate to 3.5 percent

Photo: RNZ

• Reserve Bank cuts official cash rate by 25 basis points to 3.50 percent
• Pace of rate cuts slows after three consecutive 50bps reductions - at its lowest since October 2022
• RBNZ says economy has been performing largely as expected, inflation contained
• Outlook increasingly uncertain, impact of tariffs on NZ and global growth, inflation, markets unclear
• The speed and extent of further OCR cuts to a neutral level depends on data

The Reserve Bank has cut the official cash rate by 25 basis points to 3.5 percent, as widely expected, while warning of rising economic risks.

The central bank played safe with a smaller rate cut, which it had signalled in February after three consecutive larger cuts.

"Economic activity in New Zealand has evolved largely as expected... Higher-than-expected export prices and a lower exchange rate have supported primary sector incomes and overall economic growth," the Monetary policy Committee (MPC) said in a statement.

Economists had overwhelmingly forecast the more modest cut, as the economy remained fragile with various headwinds keeping households and businesses cautious about spending and investment, as well as the likelihood of higher unemployment.

But they have also said the RBNZ should take a calm and moderate approach, given the uncertainty around the world triggered by the United States move to impose tariffs on all imports.

Weak outlook, but more cuts

The RBNZ acknowledged growing risks at home and globally may hamper economic recovery and stoke inflation.

"The recently announced increases in global trade barriers weaken the outlook for global economic activity. On balance, these developments create downside risks to the outlook for economic activity and inflation in New Zealand.

"As the extent and effect of tariff policies become clearer, the committee has scope to lower the OCR further as appropriate."

The record of its meeting said there potential plusses and minuses for New Zealand from the tariffs ranging from increased trade protectionism, weaker exports, and weaker growth on one hand through to cheaper oil on the other.

The committee did not appear to have discussed the possibility of a bigger sized rate cut.

Several retail banks - including ASB, Kiwibank and Westpac - immediately cut their floating rates in response.

Earlier on Wednesday, Finance Minister Nicola Willis was adamant the government would not overreact to world events outside its control.

OCR likely to be cut further than previously expected

ASB economists say the cash decision came in as expected, but they have significantly revised down their OCR forecast.

It believed the RBNZ would eventually cut the cash rate to a stimulatory level, and pencilled in a 2.75 percent low, compared to its previous forecast of 3.25 percent.

ASB chief economist Nick Tuffley said with the recent tariff development, risks to medium-term inflation were to the downside.

"Our view is that the balance of risks to the OCR is tilted towards the RBNZ needing to set the OCR at a stimulatory level in the face of growing risks that NZ's economic recovery and inflation will be more muted now than recently expected," he said.

ASB said a neutral rate was around 3 percent, which was why it forecast a 2.75 percent low to support economic activity.

"If the tariff war gets dialled back in tempo to more of a skirmish, then the RBNZ may not need to cut the OCR to a sub-neutral rate," Tuffley said.

"But it appears that would take a lot of negotiation or position reversal."