Reserve Bank cuts OCR to 2.5%

The Reserve Bank of New Zealand’s Monetary Policy Committee (MPC) has cut the Official Cash Rate (OCR) by 50 basis points to 2.5 percent, signalling confidence that inflation will return to the midpoint of its 1–3 percent target band in the first half of 2026.

In its October 2025 summary record, the Committee said annual consumers price index (CPI) inflation remains near the top of the target band but is expected to moderate as spare capacity in the economy increases and global inflation pressures ease. Inflation was projected to have reached 3.0 percent in the September quarter, driven largely by higher administered prices, food costs, and tradable goods. Excluding these, non-tradables inflation continued to decline to levels consistent with price stability.

Economic activity through mid-2025 remained weak, with a larger-than-expected GDP contraction in the June quarter attributed partly to seasonal data volatility and temporary supply constraints across key industries. High milk prices, adverse weather, and energy costs weighed on production, while manufacturing output was affected by limited access to domestic energy sources. Despite this, the Committee noted signs of modest recovery in the September quarter, supported by lower interest rates and stabilising consumption.

Globally, growth among New Zealand’s trading partners has proven resilient, buoyed by strong investment in AI-related industries and adaptive trade flows despite tariffs and restrictions. However, the MPC expects global growth to slow in 2026, with the overall effect of tariffs on the New Zealand economy remaining disinflationary.

The Committee acknowledged significant spare capacity domestically and said that easing financial conditions were beginning to reduce borrowing costs for households and businesses. Falling mortgage rates are expected to boost consumption, while construction and investment activity are forecast to recover from mid-2026 as demand and house prices begin to rise again.

In weighing its options, the MPC debated whether to cut the OCR by 25 or 50 basis points. Advocates for a smaller move pointed to signs of early recovery, while others argued that persistent spare capacity and precautionary behaviour from households and businesses warranted a stronger signal of support. The Committee ultimately reached consensus for a 50-point reduction, citing subdued activity and contained inflationary pressures.

Looking ahead, the MPC said it remains open to further OCR reductions as required for inflation to settle sustainably near the 2 percent target mid-point in the medium term.

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