ASB now believes just one more cut will bring the OCR to its floor of 3.00 per cent, marking the end of the current easing cycle.
Since August last year, the Reserve Bank of New Zealand (RBNZ) has reduced the OCR from a peak of 5.5 per cent to its current rate of 3.25 per cent. The steady decline had fuelled expectations that further reductions would continue into 2025. Earlier forecasts suggested a possible low of 2.5 per cent. However, recent shifts in inflation and mounting global economic uncertainty have caused economists to temper those expectations.
One of the primary factors behind this change is the resurgence of inflation. Recent data reveals a noticeable uptick in prices in categories that tend to have a strong influence on public sentiment. In the year to May, food prices alone increased by 4.4 per cent. This resurgence in consumer prices has complicated the RBNZ’s balancing act between supporting the economy and keeping inflation expectations in check.
Global developments are also playing a role in shaping monetary policy. US-imposed tariffs have added uncertainty to the global economic outlook. While the immediate impact on New Zealand has appeared limited, the long-term consequences of these trade barriers remain a concern for policymakers.
ASB economists argue the Reserve Bank is likely to be more guarded in its approach, placing a higher threshold on further rate cuts. They suggest any easing beyond August may be unwarranted unless economic conditions deteriorate significantly. The Reserve Bank is expected to pay close attention to how inflation influences expectations and wage-setting behaviour.
ASB is forecasting an additional 25 basis-point cut in August, but other banks differ in their views. Kiwibank and ANZ anticipate a drop to 2.5 per cent, and BNZ expects a 2.75 per cent floor. Westpac aligns with ASB in predicting one final cut this year.
These divergent forecasts reflect the uncertainty in domestic and global economic conditions. Factors like oil prices, tensions in the Middle East, and US trade policy could all play a role in determining the Reserve Bank’s next move.
The shift suggests the period of falling mortgage rates may be drawing to a close. With fewer OCR cuts anticipated, additional downward movement in lending rates could be limited. This may prompt Kiwis to prepare for a stabilisation in borrowing costs through the remainder of the year.
Amid these complex economic dynamics, one thing is clear: New Zealand’s monetary policy path remains highly sensitive to local inflation trends and unpredictable global developments.
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