OCR cut to 3% likely, but RBNZ in wait-and-see mode
ASB now expects one more 25 basis point cut to the official cash rate, bringing it to 3%, as New Zealand’s economic recovery remains vulnerable to global shocks, including trade wars and oil price volatility.
“Now that interest rates are back down to a ‘neutral’ level, the RBNZ can afford to wait and see how the uncertainties play out,” said ASB chief economist Nick Tuffley (pictured). “We could be around the lows in interest rates now – if not very soon.”
Kiwibank also sees further cuts as unlikely in the near term.
“Expectations for a -25bp rate cut in July have been effectively ruled out,” said senior trader Ross Weston. “For now, it’s a case of watch, worry, and wait.”
NZ recovery powered by exports, but risks remain
Tuffley said the New Zealand economy has been “turbocharged” by strong exports including dairy, beef, and fruit, as well as a modest tourism recovery. However, domestic demand remains sluggish.
“There has been some lift in spending, but spending on durable goods remains down 4% year to date,” he said, noting that homebuyers are still cautious and mortgage rate cuts have not yet meaningfully lifted the property market.
Construction may have found its trough, and the government’s “Investment Boost” policy could support capital expenditure. “We expect the economy will gradually lift to a 2-2.5% pace of growth heading through 2026, though tariffs could slow this pick-up,” Tuffley said.
Tariff turmoil clouds global outlook
ASB warns that global growth forecasts have weakened significantly due to the US-led “Liberation Day” tariffs, which are currently paused. July 9 and Aug. 12 are key deadlines to determine whether tariffs will increase again.
“Tariffs are good for trade in the way that cholera is good for keeping hydrated,” Tuffley said. “Generally, best avoided for smooth functioning.”
Tariff rates for New Zealand’s key trading partners – including the EU, Japan, and South Korea – are set at or above 20%, while China and Australia are negotiating for softer terms. Despite this, New Zealand’s exports “have carried strong momentum into 2025.”
Domestically, the economy grew 0.8% in the March quarter, beating expectations and marking the strongest result since early 2022.
Households remain cautious despite falling rates
Consumer confidence is still low and the housing market “has remained surprisingly flat” even after significant interest rate drops.
“Borrowers have been anticipating that mortgage interest rates would keep falling,” Tuffley said. “Over the rest of this year a high proportion of borrowers will roll onto low mortgage rates, noticeably boosting cashflows and spending ability.”
House price growth has been marginal and is expected to remain moderate due to neutral interest rates, elevated listings, and slower migration.
Inflation outlook mixed amid global pressures
ASB forecasts inflation to trend between 2% and 2.5% by 2026 but warns it may exceed 3% this year.
“Non-tradable inflation is continuing to decelerate,” Tuffley said, citing falling wage pressure and subdued rental growth. However, food and fuel costs are rising due to strong global demand and Middle East tensions.
“This inflation spike will concern the RBNZ, as it is wary that inflation expectations are already rising and could trigger a return to behaviours that ingrain high inflation.”
Central banks respond cautiously to trade war
Central banks globally are now navigating stagflationary pressures and policy reversals.
ASB expects the US Federal Reserve to cut another 75bp, while Canada and Europe will also ease. The RBA is forecast to cut 50bp more in the third quarter.
“The Fed can afford to wait and see exactly what inflationary impacts will come through,” Tuffley said.
He added that the OCR could finish “anywhere between 2.75% and the current 3.25%, depending on how key risks play out.”
NZD outlook: Modest gains ahead
The New Zealand dollar has remained relatively stable despite tariff-driven volatility.
“We expect the NZD/USD to lift modestly to around 0.66 later in 2026,” Tuffley said.
FX hedging remains important as risks persist, ASB reported.
