Photo: RNZ
- RBNZ cuts official cash rate by 25 basis points to three-year low of 3 percent.
- Monetary committee split between 25 or 50 bps cut - voted 4-2 for smaller.
- Leaves door open for further rate cuts, potentially down to 2.5 percent
- RBNZ sees economy growing unevenly - strong exports weak consumer demand and labour market.
- Notes uncertainty especially trade tariffs.
The Reserve Bank cut its benchmark cash rate by 25 basis points to a three-year low of 3 percent, as expected, in a split decision and left the door open for further moves lower.
The central bank said the economy had stalled in the past few months with households and businesses cautious because of rising prices, a soft labour market, and global uncertainty.
It said underlying inflation pressures were expected to reach its target of around 2 percent, even though headline consumer inflation was edging higher to the top of its broader 1-3 percent band.
The Monetary Policy Committee said it debated between no change, and 25 or 50 basis point cuts, with a final vote of four to two in favour of the smaller reduction.
It said further cuts were likely.
"Further data on the speed of New Zealand's economic recovery will influence the future path of the OCR. If medium-term inflation pressures continue to ease as expected, there is scope to lower the OCR further."
Committee split on the size of the rate cut
For the second time this year, the RBNZ's rate-setting body could not reach consensus on the OCR decision.
The summary record of the meeting showed committee members discussed three options; to hold, reduce the OCR by 25 basis points, or by 50 basis points.
In the end, it came down to the latter two options, with members voting four to two in favour of a smaller cut.
The record showed those favouring the bigger cut emphasised the weakness in the labour market and excess capacity in the economy, which would limit the upside risk to inflation, if the economy recovered faster-than-expected.
Those preferring the smaller cut felt if medium-term inflation pressures continued to ease in line with the RBNZ's estimates, further cuts were still likely.
It was noted that a 25 basis point cut gave the central bank the option to adjust its view incrementally as it received new data.
In a media briefing Reserve Bank Governor Christian Hawkesby said there was a strong consensus around the central path for the OCR - the range of views related to the risks around that outlook.
"We had some members emphasising the downside risks, other members emphasising the upside and others seeing the risks as balanced... and it illustrates the uncertainty we're in at the moment."
The argument for a more modest cut was around the fact that economic activity could bounce back after stalling in the second quarter, he said.
There was also an awareness that inflation was at the top of the range and the possibility that inflation expectations "could ratchet up", he said.
"On the downside the risk is really around the slowdown in Q2 being more persistent and really needing more of a jolt and more aggressive action from us to right the economy."
Inflation to creep up, but likely to be short-lived
The RBNZ expected annual inflation to hit 3 percent in the September quarter, reflecting higher administered prices, food prices, and other tradable goods and services.
But medium-term inflation expectations remain anchored near the 2 percent midpoint of the RBNZ's target band.
"Headline inflation is expected to converge to the mid-point of the target range over the next year as tradables inflation pressures dissipate and significant spare capacity continues to reduce domestic price pressures."
The RBNZ said high-frequency data suggested the economy contracted in the second quarter of 2025, weaker than its previous expectations in May.
Factors likely driving a slower recovery in domestic spending were falling employment, slower wage growth, weaker household savings, and a rise in the cost of essentials such as food, gas, electricity, and council rates.
The RBNZ also said tariffs and economic uncertainty were dampening the global economic outlook, but evidence suggested the world economy was responding as expected to the conditions.
It said tariffs on New Zealand exports to the US were higher than previously expected, and some firms and industries may experience more challenging export conditions.
Further data will determine RBNZ's next steps - RBNZ Governor
RBNZ governor Christian Hawkesby told reporters annual consumer price inflation was currently at top of 1-3 percent target range, however headline inflation was expected to return to around 2 percent by the middle of next year.
New Zealand's economic recovery stalled in the second quarter of this year, he said.
"Spending by households and businesses has been constrained by heightened global policy uncertainty, falling employment, higher prices for some essentials and declining house prices."
Cautious behaviour by households and businesses could further dampen economic growth, but alternatively the economic recovery could accelerate as the effects of interest rate reductions flow through the economy, he said.
Further data on New Zealand's economic recovery will determine the bank's next steps, he said.
"If medium term inflation pressures continue to ease as expected, there is scope to reduce the official cash rate further."
The official cash rate has been revised down considerably in the document, he said.
That was largely due to the stalling of growth in the second quarter, he said.
"That's meant we can have interest rates lower to support the economy and get the right amount of domestic inflation pressure."
The projection troughs at around 2.5 percent by the end of this year "and so that would be consistent with further cuts through the course of this year", he said.
Events over that period would determine whether the RBNZ would move more quickly or slowly over that period, he said.
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