Reserve Bank holds Official Cash Rate at 3.25%

• Reserve Bank holds official cash rate steady at 3.25 percent
• Halt was expected after six consecutive rate cuts by the RBNZ since last August
• RBNZ says needs more clarity on inflation, economy, and US trade policy
• Short statement says further cut possible if inflation eases

The Reserve Bank has paused its 11 month rate-cutting programme and held the official cash rate (OCR) unchanged at 3.25 percent as it waits for more clarity about the state of the local economy and global trade.

The move to the sidelines was expected by economists and financial markets after the RBNZ had aggressively cut rates at six consecutive meetings from its peak of 5.5 percent in August last year to its current level last month.

The central bank said it was appropriate to pause as it waited for more data on inflation and the local jobs market, and more detail on the impact of US tariffs.

"The economic outlook remains highly uncertain. Further data on the speed of New Zealand's economic recovery, the persistence of inflation, and the impacts of tariffs will influence the future path of the Official Cash Rate," the Monetary Policy Committee (MPC) said in a statement.

The MPC said the economy was being supported by strong export prices and lower interest rates, but tariffs were expected to affect global growth and the recovery of the New Zealand dollar with it.

It repeated the recent strengthening of inflation was expected to be temporary with the underlying rate expected back in the middle of the 1-3 percent target band by early next year.

The committee said further cuts to the OCR were on the cards.

"If medium-term inflation pressures continue to ease as projected, the Committee expects to lower the Official Cash Rate further," adding the guidance given in May still stood.

That guidance implied no more than two further cuts.

The opinion of economists is divided on the next move, with most expecting at least one more cut to 3.0 percent, most likely in August, and a minority forecasting cuts to as low at 2.5 percent by early next year.

Unlike the previous meeting, when the committee had a split vote on the decision to cut, the latest decision was agreed by all.

Commenting on the OCR remaining unchanged, Deputy Prime Minister David Seymour said headline inflation - the inflation within an economy - had been a concern worldwide.

"You see the Australians they cut hard, then they had a rebound, and now they've started cutting again.

"In New Zealand we haven't had to do that. Far better to be falling, pausing, and hopefully falling again than having to go back for a second look as other countries have had to."

Asked about the middle class, Seymour acknowledged "tough times".

"We are still digesting, frankly, a Covid hangover. We've beaten the inflation but the prices are still high and the interest rates are still to come down for a lot of people.

"I would say that we're moving in the right direction but that doesn't alleviate the pain that people are still feeling... we're doing everything we can to give middle class relief."

Pressed further, Seymour said it had only been three years since life had returned to normal in the formal sense following Covid, with restrictions still in place up to mid-2022.

He pointed to "enormous challenges" with inflation that arose during the pandemic, dropping from 5.5 percent in late 2023 to 2.5 percent and with similar drops to the OCR.

Seymour said he had no doubt the Reserve Bank had taken into account the uncertainty of US tariffs and the impacts on global trade in making its latest decision.

Finance Minister Nicola Willis said New Zealand was continuing its economic recovery despite the uncertainty.

"We always want to see inflation kept low, so those upward pressures we do keep an eye on. I note that the Reserve Bank sees both upward and downward pressures over the next few months and it's important they monitor those closely," she said.

"Inflation is price increases for everyday Kiwis, and that's why our government has been on such a mission to ensure our own spending doesn't fuel it."

Willis said due to a series of OCR reductions since August, many New Zealanders had experienced cost of living relief as they refixed their mortgages.

Labour's acting finance spokesperson Megan Woods said it was clear the Reserve Bank was expecting inflation to increase, particularly around food prices.

"It's absolutely the case there is uncertainty out there, but what we're seeing is the Reserve Bank doing the job that the government isn't doing to provide support for families. There is more the government could be doing that they're not ... we're seeing jobs like construction jobs disappear."

She said the Family Boost policy had been an "utter failure" and the changes to the scheme would not be reaching New Zealanders' pockets until October.

"Two years into this government, this is something that was promised as an election promise, we're seeing that it has failed in its first iteration so if that is all the government can point to as its success story, I think we can see what a dismal job the government is doing to help Kiwi families with cost of living."

No surprises

Economists were unsurprised by the Reserve Bank's decision to hold the cash rate steady, while the housing market is likely to see little impact.

ASB senior economist Mark Smith said the result was in line with expectations, with the OCR of 3.25 percent in the "Goldilocks zone" and annual inflation within the 1-3 percent target range.

He said the bar was high for the RBNZ to cut further given mixed data since the last rate decision in May.

"The RBNZ nonetheless, adopted an explicit easing bias, noting that if medium-term inflation pressures continue to ease as projected, the committee expects to lower the Official Cash Rate further," Smith said.

"This suggests that a 25 basis point August cut is the most likely course of action.

"We do not buy into the view that holding the OCR now will preclude the RBNZ from cutting again if needed," he said.

The country's biggest bank ANZ said recent weak economic data justified another rate cut, but accepted concerns about inflation risks would prompt the RBNZ to hold - which was what happened.

"Although the decision was consensus, it's clear from the Summary Record of Meeting that it wasn't straightforward," chief economist Sharon Zollner said.

ANZ also expected a 25 basis point cut in August.

Negligible impact on the property market

Cotality chief property economist Kelvin Davidson expected little impact on the housing market from Wednesday's decision.

"Mortgage rates have already fallen a long way from their peak - and by a similar amount to the OCR - and we're recently seeing in the data that a higher proportion of borrowers are now looking at longer-term fixed rates again, after a period of going short as market rates fell," Davidson said.

"Even if a fresh bout of competition among the banks did re-emerge in the near term, the scale would be smaller than the falls in mortgage rates we've already seen," he said.

Davidson said concerns about job security may mean existing borrowers moving to lower rates may choose to save their extra cash rather than spend it.

"All in all, the second half of the year for NZ's housing market may be just as subdued as the first," he said.

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