Infometrics CEO Brad Olsen said the Reserve Bank holding the OCR unchanged was expected, stemming from multiple impacts.
The Reserve Bank held the official cash rate (OCR) unchanged at 3.25 percent as expected, with uncertainty about the domestic economic recovery, inflation persistence, and global trade ructions continuing to weigh on the Monetary Policy Committee.
Despite the on-hold call in July, the Reserve Bank appears firmly poised to continue cutting the OCR later in the year, with the Record of Meeting definitively stating that “subject to medium-term inflation pressures continuing to ease in line with the Committee’s central projections, the Committee expects to lower the Official Cash Rate further, broadly consistent with the projection outlined in May” (our emphasis).
The Committee looked at both a 25 basis point cut and an on-hold call, with a consensus decision from all Committee members to hold the OCR at current levels.
Greater volatility and noise in recent data were emphasised by the Bank as an element of the uncertainty, with stronger consumption and investment outcomes in the first quarter of 2025, and strong recent business investment intentions, but also weaker high-frequency data in recent months.
The Reserve Bank’s base assumption is that “increased protectionism is expected to result in less inflationary pressure for New Zealand”, but that the “economic outlook remains highly uncertain”.
Infometrics CEO Brad Olsen said the Reserve Bank has taken a breath, with no change to the OCR being a likely pause before further tweaks later in 2025, as the economic and inflation pathway for New Zealand becomes more apparent.
“Importantly, the Reserve Bank is most uncertain, and therefore cautious, about how persistent near-term inflation pressures might be, and about the speed and breadth of the domestic economic recovery. In our view and reading of the July Review, global trade uncertainty appears to be less important to the Reserve Bank,” said Olsen.
“It was encouraging to see a comprehensive assessment of the topics and concerns that the Committee is working through in the July Review. Concern over how persistent inflation could be is explicitly highlighted, and rightfully so in our view. Although some pricing pressures are expected to fall back, we remain worried enough about inflation sticking around too high for too long.”
Olsen added that how the domestic economy performs from here will be critical to determining what the Reserve Bank does next. He said that continued weaker high-frequency data would be likely to convince the Bank to make a further cut, but any underlying shift in inflationary trends could equally keep the OCR on pause.
“We continue to expect a further cut to the OCR before the end of 2025, but we’re still not convinced that more cuts, taking the OCR below three percent, will be warranted. Markets are still picking the potential for more, with a 40 percent chance of a terminal OCR of 2.75 percent in late 2025 or early 2026.”
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