MNI RBNZ WATCH: MPC Holds, Eyes August Cut

The Reserve Bank of New Zealand’s monetary policy committee held the Official Cash Rate steady at 3.25% on Wednesday as expected, but signalled further cuts may follow if medium-term inflation continues to ease in line with forecasts.

Inflation is likely to rise toward the top of the Bank’s 1-3% target band in mid-2025, but with spare capacity in the economy and declining core price pressures, it still expects the rate of growth in CPI to return to around 2% by early 2026, the MPC said in a statement.

Markets had largely anticipated the hold, with pricing reflecting only a slim chance of a 25-basis-point cut ahead of the meeting. (See MNI RBNZ WATCH: OCR To Hold, Split Vote Likely) Reaction was also muted, with a cumulative 31bp of easing still priced in by November.

UNEVEN DOMESTIC RECOVERY

The decision followed signs of a patchy domestic recovery. While GDP growth exceeded expectations in the December and March quarters, high-frequency data from April and May suggest momentum has since slowed, the MPC noted. Mortgage rates and broader financial conditions have continued to ease, but the economy is still operating below capacity, with the Bank last estimating the output gap at -1.3%.

Elevated export prices and prior rate cuts are supporting activity, but consumption and investment remain cautious amid persistent international uncertainty, with the committee labeling protectionism as a significant risk to global growth that could weigh on New Zealand’s recovery and dampen inflation pressures.

The MPC also noted that the impact of recently-announced tariffs remains uncertain and could either raise or lower medium-term inflation depending on global supply chains and pricing dynamics . Meanwhile, rising global bond yields were also cited as contributing to market volatility.

Headline CPI inflation rose to 2.5% in Q1 2025 and is expected to climb further in Q2 and Q3, led by food and administered prices. However, the Bank expects this to be temporary, with inflation returning to the midpoint of the target range by early 2026 as economic slack and modest wage growth weigh on domestic prices.

Some committee members flagged the risk that near-term inflation could trigger more persistent wage and price-setting behaviour, while others pointed to moderating housing markets, continued job insecurity, and sub-trend growth in money supply as reasons to believe price pressures will remain contained.

CONSENSUS HOLDS

While a consensus was reached, the MPC's comments illustrated a split among members. The committee weighed the option of a 25bp cut, citing subdued growth and the risk that heightened uncertainty may lead to sustained caution among households and firms.

However, most members favoured holding the OCR steady, given the near-term rise in inflation and the benefit of waiting for additional data ahead of the August meeting. “There was consensus to hold the OCR at 3.25%,” the RBNZ said, reiterating that it remains prepared to lower rates further if inflation continues to ease in line with its central projections.