RBNZ seen resuming rate cuts as focus shifts to wilting economy

[WELLINGTON] New Zealand’s central bank is expected to cut interest rates this week, resuming its easing cycle after a pause in July as the economy shows signs of stalling.

The Reserve Bank of New Zealand’s (RBNZ) Monetary Policy Committee will lower the Official Cash Rate (OCR) by 25 basis points to 3 per cent on Wednesday (Aug 20) in Wellington, according to 22 of 23 economists surveyed by Bloomberg. One predicts no change. A cut would take the benchmark to a three-year low.

The RBNZ kept rates on hold last month to assess an uptick in inflation, but policymakers are expected to shift their focus to weakening economic growth. New Zealand consumers are losing confidence as unemployment rises and the housing market remains soft, while businesses are wary amid global trade tensions caused by US tariffs.

“We suspect that the case is building for a period of supportive OCR settings to jump-start the New Zealand economy,” said Wesley Tanuvasa, an economist at ASB Bank in Auckland. “Every OCR decision before the end of the year looks to be effectively ‘live’ and there is an increased likelihood of an OCR below 3 per cent before year-end.”

The RBNZ will publish its decision at 2 pm local time on Wednesday along with fresh economic forecasts. Governor Christian Hawkesby will hold a press conference at 3 pm.

Neutral rate

At 3 per cent, the cash rate would be at a level that the RBNZ deems to be neutral, neither curbing nor spurring demand. While some economists predict the bank will eventually need to take the rate into stimulatory territory well below 3 per cent, it remains to be seen whether it will signal that as soon as this week.    

All eyes will be on the RBNZ’s new projections for the cash rate. The last set in May showed the average OCR falling to a low of 2.85 per cent in the first quarter of 2026, implying a reasonable chance of a cut to 2.75 per cent.  

“Our expectation is that the bank will print a rate track not dissimilar to what it printed back in May,” said Stephen Toplis, head of research at Bank of New Zealand in Wellington. “An admission that even more work than a 2.75 per cent low might be required is plausible.”

The RBNZ has said that it expects US tariffs to damp both growth and inflation in New Zealand, primarily because they should curb global demand for the nation’s goods.

Latest data point to a growth slowdown, with some economists predicting the economy contracted in the second quarter.

The manufacturing industry contracted in May and June, while service industries have been in decline for 17 months. Unemployment has risen to 5.2 per cent, a five-year high, and house prices have stagnated since retreating from their pandemic surge.

Inflation quickened to 2.7 per cent in the second quarter and may test the top of the RBNZ’s 1 to 3 per cent target range this year, but policymakers expect the rate to retreat to around 2 per cent by early 2026.

“Our big-picture view is that we expect the RBNZ to pivot more dovish and ultimately cut the OCR to 2.5 per cent as the soft high-frequency data increasingly shows up in the hard data,” said Sharon Zollner, chief New Zealand economist at ANZ Bank in Auckland. But Wednesday “is likely too soon for a lurch in that direction”, she said. BLOOMBERG