MNI RBNZ WATCH: MPC Notes Growth Concerns, Cuts 25bp To 3.5%

The Reserve Bank of New Zealand monetary policy committee acknowledged risks to global growth following Wednesday's decision to lower the official cash rate a further 25 basis points to 3.5%, but some board members were less sure over the effectiveness of monetary policy to address a supply-side shock. 

While markets have fully priced in a 3.13% OCR at the May 28 meeting, suggesting the RBNZ will be tempted to ease another 50bp, and a 2.5% rate by November, the MPC was less sure of the trade war's impact on inflation. Most members considered the U.S. trade policies to have shifted the balance of risk for inflation lower over the medium term, but others noted it was more balanced. 

“The adaptation of global supply chains to increased trade barriers will take longer to work through,” some members noted, adding that monetary policy could do little to offset long-term negative supply-side effects of higher barriers to international trade. However, the committee highlighted significant downside risks to global growth driven by the trade war. “This will have adverse effects for domestic economic activity,” it added. 

Today's cut was largely anticipated following the MPC’s strong signal at the last meeting, which resulted in a 50bp cut. (See MNI RBNZ WATCH: MPC Set To Cut 25 Basis Points To 3.5%) The Reserve has now delivered a cumulative 200bp of reductions since August 2024. 

The MPC’s statement following Wednesday’s decision pointed to significant spare capacity and a weaker outlook driven by global trade policies that should keep inflation close to the RBNZ’s 2% mid-point target. 

STEADY HAND

The MPC noted the economy had largely evolved in line with its February forecasts. “Higher-than-expected export prices and a lower exchange rate have supported primary sector incomes and overall economic growth,” the MPC added. “While monetary restraint has been removed at pace, household spending and residential investment have remained weak.”

The RBNZ noted future policy decisions will be determined by the outlook for inflationary pressure over the medium term. “Having consumer price inflation close to the middle of its target band puts the Committee in the best position to respond to developments," the MPC noted. "As the extent and effect of tariff policies become clearer, the committee has scope to lower the OCR further as appropriate."  

Stats NZ will release Q1 CPI, which the RBNZ in February forecast at 2.4%, on April 17. The Q1 labour report will also print on May 7. The RBNZ had expected unemployment to peak at 5.2%, before falling to 4.9% by December. The Reserve will likely need to change both of these metrics modestly when it next updates the Monetary Policy Statement at the May 28 policy meeting to reflect its changed assumptions on medium-term growth.