RBNZ Sees Lower Rates but Timing Hinges on Economy: Governor Hawkesby

The Reserve Bank of New Zealand lowered its official cash rate by 25 bps to 2.25% at its final meeting of the year, a widely expected move that brought borrowing costs to their lowest level since mid-2022. Policymakers said the decision reflected significant spare capacity in the economy and easing inflation pressures. Annual CPI rose to the top of the 1–3% target band in Q3, but core and non-tradables inflation continue to moderate, supporting expectations for inflation to return to 2% by mid-2026. Economic activity remained weak through mid-2025, with GDP contracting in Q2, though near-term indicators suggest a gradual recovery. The central bank noted balanced risks, cautioning that weak household and business confidence could restrain the recovery, while stronger housing or export-driven demand could keep inflation more persistent. The MPC said future moves depend on the economic and inflation outlook.

The Reserve Bank of New Zealand lowered its official cash rate by 50 bps to 2.5% at its October 2025 meeting, a larger-than-expected move compared with the anticipated 25 bps cut, bringing borrowing costs to their lowest level since mid-2022. Policymakers cited prolonged spare capacity, subdued domestic activity, and downside risks from cautious household and business behavior, which could slow the economic recovery, prompting a stronger easing. Inflation also remains near the top of the 1–3% target band but is expected to return to the 2% mid-point by mid-2026 as tradables pressures ease. Headline inflation is estimated at 3% in Q3, driven by higher administered prices, food costs, and tradable goods, though underlying non-tradables inflation continues to moderate. Economic activity remained weak due to supply constraints and global policy uncertainty, while consumption is gradually recovering. The Committee remains open to further easing to anchor inflation near the 2% target.

New Zealand’s central bank governor, Christian Hawkesby, said Thursday the future path of the official cash rate (OCR) will depend on how quickly the economy recovers. “While our central projection for OCR is to fall to around 2.50% by the end of the year, that could occur faster or slower depending on how the economic recovery evolves,” he noted in a speech in Auckland. The RBNZ cut the OCR in August to a three-year low of 3.00% and signaled further reductions as domestic and global headwinds weigh on growth. Hawkesby acknowledged it has been a challenging six months for the central bank, marked by the surprise resignation of Governor Adrian Orr in March and the recent departure of chairman Neil Quigley. “Trust and confidence in our economic institutions is what underpins our financial system and supports economic prosperity,” Hawkesby said, stressing the RBNZ remains focused on price stability and financial resilience.