Split vote, rate cut, risks cloud RBNZ outlook
The Reserve Bank (RBNZ) has cut the official cash rate (OCR) by 25 basis points to 3.25%, in a move widely expected by financial markets. But the tone of the decision, and the fact that it came via a split vote among Monetary Policy Committee (MPC) members, signalled heightened caution about what lies ahead.
“While the RBNZ downgraded its economic forecasts compared to February and emphasised the high degree of uncertainty around global conditions, there was a surprising amount of caution around the timing and extent of further OCR cuts,” said Westpac senior economist Michael Gordon (pictured left).
Split decision signals growing divide
The decision marked only the second time the MPC has voted rather than reached consensus, with one member preferring to keep the OCR on hold.
“The most surprising aspect of the OCR decision is that it was reached by a split vote,” Gordon said. “It’s entirely reasonable to expect a greater range of views as policy nears the end of a cycle, and it becomes less obvious what or when the next move should be.”
ASB chief economist Nick Tuffley (pictured right) also highlighted the rare division, noting that “the MPC discussed both a 25bp cut and keeping the OCR on hold. In the end, the committee put it to a vote, and one member voted to keep the OCR steady.”
Tuffley called it “a bit of a ‘cold’ cut… delivered with a bit of the reluctance of a Crusaders fan last Friday night having to reluctantly turn away from the TV in the 77th minute to greet an unexpected guest.”
“The news that the cut wasn’t a unanimous decision wasn’t greeted with warm enthusiasm by financial markets – wholesale interest rates jumped over the course of the day,” he said.
RBNZ likely to pause in July
Updated forecasts show the OCR falling to 2.85% by early 2026, compared to a previous low of 3.1%. Gordon said another rate cut is likely this year, but not at the next meeting.
“We now think that the policy committee will take a pause at its 9 July meeting, with the next rate cut more likely to come at the August MPS,” he said.
RBNZ governor Christian Hawkesby also said a July cut was “not a done deal” and emphasised the RBNZ has “no bias” on the outcome. Tuffley agreed, noting that “the fact that a large proportion of mortgages will refix shortly at much lower interest rates means the lags for OCR cuts to impact are wearing off.”
Data and inflation expectations under scrutiny
RBNZ expects annual CPI inflation to peak at 2.7% in the September quarter before falling to 1.9% in early 2026. But inflation expectations have ticked up again, and will be a key focus ahead of the July review.
“Evidence these are falling back will likely be important in making the hawks on the MPC more comfortable with getting back on the easing track,” Gordon said.
Tuffley identified two key areas of focus for the central bank: inflation expectations and trade war impacts.
“Sizable lifts in inflation expectations that persist, and lifts in businesses’ pricing intentions, will have the RBNZ proceeding more cautiously,” he said.
“Ahead of its July Review it has the ANZ’s June Business Outlook and the NZIER’s Quarterly Survey of Business Opinion as gauges… enough time to spook the RBNZ but not necessarily enough time to ease its concerns about people starting to behave like high inflation is back.”
Trade war uncertainty looms large
Global trade tensions are now a core part of RBNZ’s risk modelling. The bank included two alternative scenarios in its Monetary Policy Statement: one showing the OCR falling to 2.55% under a demand shock, and another lifting back to 3.5% after an initial drop under a supply shock.
“The RBNZ noted that the risks surrounding the economic outlook are ‘heightened’,” Gordon said. “Notably, the RBNZ didn’t explore a scenario where the impact of the tariffs turns out to be less than in their central view.”
Tuffley said that the impact of tariffs is still unclear. “The reality is there is little clarity around how the tariffs will impact – not least because no one knows where the tariffs will settle,” he said. “The vote highlights starkly that the path forward for monetary policy will be heavily driven by how the RBNZ interprets events and data.”
Dairy sector offers rare optimism
Amid the uncertainty, Tuffley pointed to a positive development for the economy: “Fonterra came out last week with its milk price forecasts… an initial forecast range for next season with (slightly skewed) mid-point of $10 for the season just started.”
He said this strength in the dairy, meat, and horticulture sectors is “a good position for NZ to have a key export sector doing well in current times.”
Markets adjust to shifting global signals
Looking ahead, Tuffley said markets are becoming more cautious about global tariff announcements, citing a new financial slang term: “TACO – Trump Always Chickens Out.”
After the US president proposed doubling tariffs on steel and aluminium last week, Tuffley said: “So far, US equity markets have decided it’s not that big a deal, although shares in US automakers are down 3-4%.”
He also flagged upcoming global data, including Australian Q2 GDP, the ECB and Bank of Canada’s rate decisions, and US Non-farm Payrolls, as potential drivers of sentiment in the coming weeks.
