OCR call: Reserve Bank on track for ‘more cuts sooner’ but reduces forecast for house prices

The OCR track implied a 25bp cut in both April and May to 3.25%. It projected a drop to 3.14% by the end of the year and then flatlined at 3.1% out to 2028.

“That’s the RBNZ’s way of saying there’s a 60% chance they go from 3.25% to 3%,” Kerr said.

“It’s kind of needed, but we’re not quite there yet. In time, they should get to 3%. And the risks are to the downside.”

In its statement, the RBNZ’s Monetary Policy Committee said economic activity was still “subdued”.

“With spare productive capacity, domestic inflation pressures continue to ease,” the committee said.

It warned topline consumer price inflation “was expected to be volatile in the near term, due to a lower exchange rate and higher petrol prices”.

But Reserve Bank governor Adrian Orr, speaking at the post-MPS press conference, said he was confident underlying domestic (non-tradeable) inflation would continue to fall.

“We are looking at lowering the Official Cash Rate [more quickly] than we projected in November,” he said. “We are easing with more regular graduation from here.”

“What we’re looking at is an economy that is growing slower than the potential growth rate … so we still have downward pressure on inflation.”

“We’ve moved on. We’ve seen more data and we’re more confident than we were in November,” Orr said.

Despite remaining below capacity, he said he expected economic growth to recover during 2025.

Lower interest rates would encourage spending, he said.

Higher prices for some of our key commodities and a lower exchange rate would also increase export revenues.

“Employment growth is expected to pick up in the second half of the year as the domestic economy recovers.”

The RBNZ warned elevated global economic uncertainty was expected to weigh on business investment decisions.

But it noted the net effect of US plans of tariffs and “future changes in trade policy” for New Zealand was currently unclear.

Orr said he believed monetary policy was now well-placed to cope with both upside and downside risks to its projections.

One risk was the economic recovery took longer than expected, he said.

The “slightly longer-term risk” was the geopolitical fragmentation the world was seeing.

“We don’t know what’s going to happen with tariffs.”

While tariffs and US higher inflation might present an inflationary risk to New Zealand – due to a lower Kiwi dollar lifting import costs – the RBNZ also emphasised the risk they present to global growth.

If that occurred, it would be a disinflationary force.

The major banks all moved quickly to pass the 50bp cut through to floating rates.

However, one economist warned the pass-through through to fixed rates might be limited.

CoreLogic NZ chief property economist Kelvin Davidson said the message for borrowers was interest rates had further to fall but the drops could be slower or smaller than those seen to date.

“It’s also going to be really interesting to see whether the recent stampede towards borrowers taking floating and short-term fixed rates go into reverse at some stage in 2025,” he said.

The RBNZ made a significant downgrade to its house price forecasts, noted Westpac chief economist Kelly Eckhold.

New forecasts dropped growth expectations from 7.1% to 3.8% for 2025.

“While the recent strengthening (but still modest) momentum may justify the direction of this adjustment, some forward indicators look positive,” he said.

“Mortgage approvals are now running at their highest levels since 2021 when house prices were rising very strongly. While we don’t think house prices will behave anything like they did in 2021, we see upside risks to the RBNZ’s assessment on this score.”

If the housing market picked up more than what was forecast, that could reduce “the Monetary Policy Committee’s ardour in cutting the OCR by mid-year”.

Westpac is forecasting the RBNZ will cut the OCR by 25bp increments at the April and May meetings but then leave at 3.25%.

Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003. To sign up for his weekly newsletter, click on your user profile at nzherald.co.nz and select “My newsletters”. For a step-by-step guide, click here.