MNI RBNZ WATCH: MPC Set To Cut 25bp, Lean Into Future Data

The Reserve Bank of New Zealand is likely to cut its official cash rate by 25 basis points to 3.25% at its meeting next Wednesday and shift to a more data-dependent stance.

Since its first 25bp cut in August, the RBNZ has eased rapidly from its 5.5% peak. Now approaching its estimated neutral range of 2.5%–3.5%, the Monetary Policy Committee is expected to lean more on consumer and business confidence indicators, as well as inflation expectations, particularly if global trade tensions worsen.

Markets have fully priced in the cut and see the OCR ending the year at 2.85%, up from 2.5% following the last MPC meeting in April, which acknowledged risks to global growth. (See MNI RBNZ WATCH: MPC Notes Growth Concerns, Cuts 25bp To 3.5%) However, the degree and pace of further easing in the second half will be dictated by the performance of global trade and its impact on the New Zealand economy.

While a 50bp cut could be discussed, the RBNZ is likely to stick with a 25bp move while awaiting clearer signs on domestic economic strength and the direction of U.S. trade policy, with a larger reduction potentially negatively impacting market sentiment. 

Upcoming key data include Q1 GDP on June 19 and Q2 CPI on July 21, making the Aug 20 meeting the next likely occasion for further easing.

MIXED DATA

Signs of stabilisation have emerged, with Q1 retail volumes up 0.8% and Q4 GDP growing at 0.7%, beating the RBNZ’s forecast of 0.3%. (See chart) However, a slight rise in near-term inflation could prompt the RBNZ to lift its peak CPI forecast when it updates its Monetary Policy Statement next week and spark debate among committee members over the merits of more aggressive easing.

Food prices rose 0.8% in April, lifting the annual pace of increase to 3.7% – the highest since January 2024 – while airfares and electricity prices also rose, according to the Selected Price Indexes released by Stats NZ last week. This followed Q1's inflation result released in April, which exceeded the RBNZ's expectations, climbing from 2.2% to 2.5%.

The RBNZ’s inflation expectations survey showed both short- and long-term measures ticking higher. (See chart)

FUTURE CONCENS

The RBNZ will need looser looser monetary policy if business confidence fails to recover, with the OCR potentially falling to the lower limits of neutral at around 2.5% by year-end, former staffers recently told MNI. (See MNI: Markets Underestimate RBNZ Easing, Ex Officials Say) However, one former official noted New Zealand risked slight stagflation that could temper the pace of easing, particularly thanks to the Reserve's single focus on inflation, should the rate of increase in prices continue to exceed expectations as growth slows.