RBNZ will be watching inflation pressures carefully ahead of June decision
The Reserve Bank’s decision to cut the Official Cash Rate to 3.25% this week was broadly expected, but the conversations happening behind the scenes show a central bank walking a careful line between delivering support and managing risk.
The Monetary Policy Committee vote – five to one in favour of easing – highlights just how live the debate still is. While further cuts are still likely, the message was equally clear: not at any cost, and not without watching inflation expectations like a hawk.
“Internationally, developments look likely to lower global growth,” Reserve Bank governor Christian Hawkesby said at the MPS press conference.
“Both high tariffs and elevated policy uncertainty is likely to weigh on domestic economic activity and inflation pressures – however, there is considerable uncertainty around these judgements.”
Cuts still coming, but the road is bumpy
ASB chief economist Nick Tuffley said that the RBNZ is still in easing mode, but it’s not blindly charging toward lower rates. Tuffley expects further cuts, with 2.75% still the likely destination – however, he noted that the path could easily include pauses, detours, or even a rethink if inflation dynamics shift.
“It seems likely that they’ll still cut at the July meeting,” Tuffley told NZ Adviser. “But it’s always possible that we get a pause along the way as the Reserve Bank works through which way the inflation impacts will lie based on what’s happening overseas.”
The Monetary Policy Statement revealed that the Reserve Bank’s debate was between keeping the Cash Rate at 3.50%, or lowering to 3.25%. With some commentary urging a 50 basis point cut in May, Tuffley said that there wasn’t a strong case for such a move at this meeting. Additionally, Tuffley noted that the Reserve Bank would also be watching consumer expectations and behaviour ahead of the next meeting – and if it heads too high, we may well see a pause on the rate cuts.
“It will be wary if it sees people’s inflation expectations start to rise in surveys,” Tuffley said.
“If we all think inflation is going to be pretty strong, we get more accepting of price increases and more tempted to raise prices. That in itself makes it much more difficult to contain inflation. That risk is there and has crept up, but the Reserve Bank thinks it’s not high enough to stop it from cutting rates.”
Impact on mortgage rates remains modest
While the OCR cut will help reinforce downward pressure on interest rates, there’s no sign of banks rushing to cut their rates in response. The overall impact on mortgage rates is likely to remain modest, as the bulk of this move and the easing still expected to follow has already been absorbed into the market.
RBNZ assistant governor Karen Silk said that mortgage pricing has been tracking ahead of the OCR, and added that rates are being influenced by other factors beyond the cash rate.
“Our view is that the decision is pretty much already baked into mortgage rates,” Silk said at the MPS press conference.
“There are a lot of factors beyond the OCR that feed into mortgage rates - market volatility and global uncertainty can have an impact on bank funding costs. We’re also in a very low credit growth environment, and during that period, you tend to see greater competition driven through price amongst the banks. Our view over the last six months has been that mortgage rates in the 5-5.5% [range] are probably reflecting where we thought they would land.”
Tuffley noted that mortgage rates had started dropping even before the OCR cuts began, and only external events would have a strong impact on their trajectory in the near future.
Looking ahead to June, he said the “best case scenario” is a tariff-free world where there isn’t too much disruption and uncertainty, which would ease the impact on inflation. However, there is also a very real chance of inflation growing at a sharper rate than expected.
“There’s a chance of those behavioural shifts coming through, and that would make the Reserve Bank be a bit wary about being too quick to cut rates,” Tuffley said.
Hawkesby noted that there are a spectrum of potential scenarios going into June, but ended with an optimistic tone about the current position.
“The economy is well positioned to navigate developments both domestically and internationally to keep inflation pressures at target in the medium term,” he said.
“There are many different paths that the Official Cash Rate could take from here, but we are in a very good spot to navigate it as developments play out.”
