Economic outlook has deteriorated since February
As the Reserve Bank (RBNZ) prepares to release its May monetary policy statement, debate is intensifying over whether the central bank should step up the pace of easing.
Economic conditions, both domestic and global, have softened since the last update, and a growing chorus is calling for the official cash rate (OCR) to fall more decisively.
Kiwibank economists argued that RBNZ must shift decisively away from the cautious 25 basis point (bp) approach seen in recent meetings.
“The economic developments since the RBNZ’s last MPS have deteriorated here, and especially offshore. The justification of a more ‘go for growth’ focussed RBNZ has strengthened,” they wrote.
“Hawkesby (hopefully Dovesby) could easily deliver a 50bp move next week and signal another 50bps to 2.5% to come. That would set policy about right for a recovery. And it’s not mucking around with 25bps moves, delaying the inevitable.”
Three possible paths for May
Kiwibank laid out three scenarios for the upcoming OCR decision. The most tepid involves a 25bp cut with no meaningful shift in the rate forecast, leaving the terminal OCR near 3%. They argued this would disappoint markets and show RBNZ is “out of touch with our economic reality.”
A middle-ground scenario sees a 25bp cut and a lowered OCR track to 2.8%, broadly aligning with current market pricing. This would support short-term mortgage rates but leave longer-term rates largely unchanged.
“That’s not what we need either,” the Kiwibank economists said.
The third and preferred option: a bold 50bp cut and a forward track heading toward 2.5%.
“The shock without Orr would see wholesale rates poleaxed. The two-year swap rate would immediately test 3%... All mortgage rates are likely to be lowered, as needed,” the Kiwibank economists said.
Business frustration adds to pressure
Kiwibank’s case is backed by business sentiment. In their latest podcast, Urgent Couriers managing director Steve Bonnici expressed concern about the RBNZ’s policy lag.
“I'm frustrated (by the RBNZ's actions)...The lack of understanding of what Kiwi businesses were going through out there... we’re a bellwether... we’ve had more clients go into receivership or liquidation in the last 12 months than in any of the other cycles (back to the 1980s),” Bonnici said.
ASB: Data supports 25bp cut – but guidance matters
ASB economist Wesley Tanuvasa expects RBNZ to deliver a 25bp cut but noted that “guidance for monetary policy beyond that is a bit complex.”
Tanuvasa pointed to a mixed domestic picture: strong exports and tourism, but muted household spending and weak job creation.
“We think overarching caution remains the vibe du jour for many Kiwi households... although lower interest rates should flow through to a few extra trips to the mall, household spending growth is expected to be gradual,” he said.
Inflation remains within the target range but recent food and fuel costs have ticked up.
“The near-term inflationary peak looks slightly firmer than the RBNZ’s February pick of 2.7% in Q3,” Tanuvasa said.
Westpac: 25bp cut expected, but inflation risks linger
Westpac chief economist Kelly Eckhold anticipates a 25bp cut to 3.25%, along with a revised OCR track that allows for further easing later in 2025.
“We expect the RBNZ’s OCR profile being revised down by around 20bp to around 2.9% by the end of 2025,” Eckhold said.
While acknowledging weaker domestic growth, Eckhold believes RBNZ will remain cautious due to inflation risks and global uncertainty.
“With inflation nudging 3% there’s no strong case for taking insurance by easing pre-emptively right now...,” Eckhold said. Taking the time to assess the impact of the easing already delivered and the likelihood of future damage to the economy... makes sense.”
Market, mandate, and messaging on a knife edge
Ultimately, the May MPS is shaping up to be a defining moment for Christian Hawkesby as he steers the RBNZ beyond the Orr era. The decision will reflect not just macro data, but also how the central bank balances credibility, flexibility, and communication under pressure.
Kiwibank summedit up bluntly: “Get to neutral, and get the economy moving. Ultimately, it’s better to act swiftly and decisively to get lower rates feeding through faster. More meaningful cuts are required here and now.”
