Cutting the OCR by 25 basis points was expected, according to Infometrics, which cautioned the possible lifting of interest rates.
The Reserve Bank’s decision to cut the official cash rate (OCR) by 25 basis points was in line with market expectations. However, the path to that decision was altogether more surprising, with two of the Monetary Policy Committee’s six members voting in favour of a 50-point cut instead.
The Committee stated that if medium-term inflation pressures continue to ease as expected, there is scope to lower the OCR further. With the Bank’s OCR projections now bottoming out 30 basis points lower than previously forecast, at 2.55 percent in March 2026, there is little doubt about another cut before the end of this year.
The Committee has been spooked by the weaker global growth outlook, particularly in China, as well as an estimated 0.3 percent contraction in New Zealand’s GDP in the June quarter, a weaker result than we and most other forecasters currently have pencilled in. The Bank noted concerns about slow growth in parts of the economy that are most sensitive to interest rates, including residential construction, house prices, and retail activity.
The Bank expects quarterly GDP growth to accelerate to 0.8 percent in December, which is above potential, and will therefore start to reduce spare capacity in the economy. This pick-up reflects the effects of previous official cash rate reductions filtering through into economic activity, particularly via refixing of mortgages at lower rates, as well as stronger spending in rural areas.
The Bank forecasts inflation to reach 3.0 percent pa in the current quarter, before easing back to 2.3 percent pa in early 2026. Although this track is slightly higher the 2.7 percent pa peak previously predicted, the Bank believes that significant spare capacity continues to reduce domestic price pressures, a near-term inflation assessment that we agree with.
The Bank is still keeping a watchful eye on inflation, stating that there was a material possibility that it rises above the target band, but that the period in which this is most likely to occur is too soon for monetary policy to have any meaningful effect, consistent with the expectation that this inflationary pressure is short-lived.
Gareth Kiernan from Infometrics said that the switch from “no change” at July’s Monetary Policy Review to the possibility of a 50-point cut at yesterday’s meeting was surprising for how far things have swung around, and it possibly reflects elevated levels of uncertainty hanging over the economy at the moment. Based on the balance of risks revealed by the vote, Infometrics now forecasts two further cuts to the OCR, in both October and November, taking the OCR to a low of 2.5 percent.
If economic growth has started to accelerate more consistently before the end of the year, but the Reserve Bank is still cutting the OCR, there is a sizeable risk that these late-cycle rate cuts overstimulate the economy by the end of 2026. The Bank has at times displayed limited ability to be forward-looking when setting monetary policy over recent years, and it again risks setting interest rates based too much on current conditions.
As a result, if the OCR goes to 2.5 percent by the end of this year, Infometrics cautioned that the Bank is likely to need to lift interest rates again in late 2026 to re-establish interest rates at a more “normal” or neutral level over the medium term.
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