The MPC cut the OCR 50bp on Wednesday, following October’s similar reduction. The move was largely anticipated amid headline and underlying measures of inflation falling consistently towards the Reserve’s 1-3% target midpoint and the slowing economy. (See MNI RBNZ WATCH: MPC To Consider 75bp Cut, 50bp Most Likely)
RBNZ overnight index swaps firmed 5-10bp firmer across dates following the decision. Markets have priced in a 3.85% OCR by February and a 3.4% rate by May.
DESTINATION NEUTRAL
The RBNZ expects the OCR to fall back towards neutral – which it estimates to be between 2.5-3.5% – sometime by the end of 2025, Orr said, noting the rate would likely not fall below the lower bound of its range this cycle on the current economic outlook. “Judging by how inflation pressures are behaving relative to our measure of demand, we're feeling confident we're on course,” he noted. “The way the economy reacts to changes in interest rates gives us an indication of how far north or how close we are to neutral.”
The November Monetary Policy Statement, released alongside Wednesday’s decision, showed the Reserve expects a 50bp reduction next, an-then a 25bp decrease by Q2, a steeper decline compared to its August forecast.
TRUMP TRADE
While Orr ruled out any further hikes in the near term, brushing off concerns around incoming U.S. trade policies and their impact on the New Zealand economy, he noted tariffs had the potential to induce price volatility. Exporters could dump goods into countries without trade barriers, he said.
However, over the mid-to-longer-term, tariffs would decrease productive capacity, Orr added. “Which means more inflation per unit of output,” he explained. “The general consensus globally is that the tariffs would put some upward pressure on the level of prices internationally and that's in part why you've seen longer-term U.S. interest rates rise.”
The Reserve revised its H1 2025 inflation outlook down slightly, but expects higher H2 prices, with both Q3 and Q2 up 10bp to 2.5% and 2.4% y/y.
While tariffs could see central banks globally increase their neutral rate estimates, Orr stressed the independence of the RBNZ’s monetary policy. “We don't see it as a concern for New Zealand's inflation, because we set our own monetary policy. It just means that there may be more noise."
INFLATIONARY RISKS
Orr noted domestically driven inflation, poor productivity and continued weak GDP growth posed the greatest risk to the Reserve’s outlook.
“Domestic or services inflation driven by spare capacity in this country is still heightened,” Orr continued. “We are confident that the domestic inflation pressures have and are continuing to ease. They just aren't there yet at the midpoint.”
The RBNZ also revised its GDP outlook lower across 2025, 2026 and 2027, averaging 0.6% rises per quarter.
Orr noted the revisions were driven by a lower productivity growth view and changes to how it calculates changes in population growth, particularly from migration.
The MPC will next meet Feb 19.