“In the document, that comes broadly in two 25bp steps. It doesn't stop there. We have our projection of the OCR being around 3% by year end.”
The Monetary Policy Committee’s decision to reduce the OCR was widely expected and signalled by Orr in late 2024. (See MNI RBNZ WATCH: MPC To Cut Another 50bp, Chart Neutral Course) The RBNZ has now eased the OCR a cumulative 175bp since August from its 5.5% peak reached in May 2023.
Orr noted core inflation is subsiding, despite being above the 1-3% target band's midpoint. “We are just easing with more regular graduation from here,” he noted. “But through it all, economic growth is positive around the 2.5% annual, employment growth is picking back up, but inflation and spare capacity is slowly easing.”
Former RBNZ economists had expected stronger cuts throughout 2025 as the Reserve moved the OCR towards, or even below, the neutral rate, which it estimates between 2.5-3.5%. (See MNI INTERVIEW: RBNZ To Ease Below Neutral By Q3 - Ex Official)
CHANGED FORECASTS
While the RBNZ sees little change to GDP growth at about 0.6% per quarter in 2025, it predicts slightly stronger year-end inflation, with Q1 and Q2 CPI printing at 2.4%, before rising to 2.7% in Q3 and finishing Q4 at 2.5%, 10bp higher than its November projections. The Reserve, however, sees the OCR at 3.1% by December, down from its prior projection of 3.4%. Markets have priced in a 3.153% rate by the November meeting.
Orr noted the Reserve had greater confidence within its data compared to November and stressed its forecasts were endogenous, and that the growth path would differ more widely from November without the tweak to the OCR track.
While the New Zealand economy was probably past a turning point, and would continue to grow throughout 2025, short-term risks could still impact GDP, he added. “We're in the middle of economic fragmentation, we don't know what may happen with regard to tariffs but we know that will slow potential global economic growth,” he explained.
Growth could also pick up in the second half once investor confidence strengthened, he added. “In the near term, it may take a little bit longer... and then in the medium term, [growth] could come back quicker.”
