The Reserve Bank of New Zealand (RBNZ) is expected lower interest rates by 25 basis points to 3.50% at its upcoming meeting tomorrow at 6:00 AM (GMT+4).
The central bank is also expected to discuss New Zealand’s economic performance in Q1 2025, inflation projections and the outlook of the economy and interest rates.
The RBNZ has lowered the Official Cash Rate by 175 basis points since August 2024. The most recent cut was made on February 18, 2025, by 50 basis points, bringing the rate down to 3.75%.
Forecasts indicate a slower pace going forward, with smaller adjustments anticipated in upcoming sessions. This quick easing phase came after three consecutive 50 basis point cuts. ⁽¹⁾
More rate cuts are expected in May and beyond, targeting a neutral rate of approximately 3.00% by the third quarter of 2025, as the economy emerges from recession.
The RBNZ will focus on economic recovery and inflation management, supported by recent data showing inflation within the central bank’s target range and a softening labor market. ⁽²⁾
Rebound From Recession and Stabilized Inflation
New Zealand’s economy rebounded after entering a recession in Q4 2024 where the economy grew by 0.7%, which beat analysts’ estimates at 0.4%. Inflation has now stabilized around 2.2%.
Economic growth is expected to pick up, with signs that a weak labor market could support the case for rate cuts. ⁽³⁾
How Will Tariffs Impact the RBNZ’s Decision?
The recent tariff announcement from US President Trump could impact the RBNZ’s decision. While New Zealand’s direct exposure to US tariffs is limited, indirect effects through key trading partners like China and Australia could weigh on economic growth.
The RBNZ noted in its February 2025 Monetary Policy Statement that tariffs might reduce demand for New Zealand exports by slowing growth in these major markets. ⁽⁴⁾
Tariffs can make the RBNZ’s choice more difficult due to the high inflationary pressure tariffs bring. Despite inflation declining to 2.2%, a weaker New Zealand Dollar (NZD) and a higher US Dollar could increase import costs and risk inflation rising further. Rate cuts could also slow if inflation expectations rise. ⁽⁵⁾
Impact on the New Zealand Dollar
A 25-basis point rate cut may not cause major moves in the NZD as this outcome is widely expected by traders. However, if the RBNZ surprises markets with a larger cut or more dovish signals, the NZD could weaken further.
A successful economic recovery, as projected in the Budget Policy Statement 2025, could potentially stabilize or even lift the NZD later in 2025, especially if commodity prices like dairy, which remains their top export, remain strong.
