As expected, the RBNZ lowered interest rates from 3.50% to 3.25% in their May decision, marking its sixth easing move since starting their rate cut cycle in August 2024.
The official statement revealed that policymakers balanced domestic inflation pressures against mounting global economic uncertainties driven by escalating trade tensions.
Key Takeaways:
- RBNZ reduced OCR by 25bp to 3.25% in a 5-1 majority vote
- Annual CPI rose to 2.5% in Q1 2025, remaining within the 1-3% target band
- International trade tensions and policy uncertainty expected to dampen New Zealand’s economic recovery
- Underlying inflation measures continue to trend lower despite headline uptick
- Significant economic slack persists, supporting the case for monetary easing
RBNZ officials noted that while New Zealand’s economy shows signs of recovery after contracting through mid-2024, the central bank highlighted several factors supporting continued monetary easing: spare productive capacity remains throughout the economy, core inflation measures declining, and labor market conditions easing with slowing wage growth.
Link to Reserve Bank of New Zealand Policy Statement (May 2025)
The RBNZ maintained flexibility in its forward guidance, noting it is “well placed to respond to both domestic and international developments to maintain price stability over the medium term.”
The central bank highlighted significant uncertainty around how global trade tensions and policy changes will ultimately impact New Zealand’s economy, citing potential outcomes that would dictate their future decisions:
- Higher trade costs could increase medium-term inflationary pressure
- Greater policy uncertainty could reduce global investment and lower import prices
During the press conference, RBNZ Governor Hawkesby noted that the decision to hold a policy vote was a healthy sign and that economic projections are not enough to establish a bias for the next meetings.
Market Reaction
New Zealand Dollar vs. Major Currencies: 5-min
Overlay of NZD vs. Major Currencies Chart by TradingView
The New Zealand dollar, which had been cruising slightly lower ahead of the announcement, strengthened broadly following the decision, as the central bank refrained from making a much larger 0.50% interest rate cut.
The Kiwi extended its rally during the press conference, as Governor Hawkesby reiterated that rates are now in the “neutral zone” and that they are not on a pre-set path for easing since they would evaluate the economy’s reaction to global trade pressures on a meeting-by-meeting basis.
NZD raked in its strongest gains versus GBP (+0.37%) and EUR (+0.37%) a few hours after the actual event while NZDUSD (+0.10%) kept its rallies limited.
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