The Reserve Bank has cut the official cash rate by 25 basis points to 3.25 percent, as widely expected, but had a division of opinion whether to hold or cut.
The central bank delivered a second consecutive small rate cut, which it had signalled in April after a succession of large cuts last year, but did not mention the prospect of future rate cuts as it had done in previous statements.
“The case for lowering the OCR to 3.25 percent highlighted that CPI inflation is in the target range and there is significant spare capacity in the economy,” the Monetary Policy Committee (MPC) meeting record showed.
Economists overwhelmingly forecast the cut, as the economy remained soft because of the uncertainty caused by the US tariff policy and households and businesses keeping tight control on spending and investment.
However, the committee minutes showed a debate on whether to hold at 3.5 percent or cut.
“In considering the merits of holding the OCR unchanged at 3.50 percent for this meeting, some members noted that this would allow the Committee to better assess whether increased economic policy uncertainty was having a noticeable impact on household and firm behaviour.”
The MPC voted 5-1 to cut the rate, only the second time in its short history it’s recorded a split vote.
The RBNZ said it expected inflation, which spiked to 2.5 percent in the first quarter of the year, should return to the desired 2 percent target point over time.
Forecasts issued with the statement indicated weak economic growth for most of the year, and pointed to a further 25 basis point cut to 3.0 percent by the end of the year.
Prime Minister Christopher Luxon said the reduction of 25 basis points was “very good news”.
“If you think of a $500,000 mortgage, 25 years, it means fortnightly payments have been lowered by over $300 with the interest rates cuts that we’ve seen since we came to power,” he said.
“That’s real money going into Kiwis’ back pockets that they get to spend in the economy again and that’s what we’re trying to do, make sure we help people through the cost of living and one way we can do that is lower inflation and lower interest rates.”
Finance Minister Nicola Willis said their economic decisions had contributed to the cut, opposed to the last Labour-led government.
“What we know for a fact is that the last government’s extremely high spending levels added fuel on the inflation fire and let inflation get up over 7 percent” she said.
“We now have inflation back in band and that’s partly because we’ve taken such a more responsible approach to spending.”
She said the government’s operating allowance was the lowest in a decade, which showed a prudent approach.
“Governments can make things a lot worse when it comes to inflation in interest rates, and we’ve taken it upon ourselves to make things better,” she said.
Willis said the government had struck a really balanced approach which was directed at delivering “considerable savings” but also to keep investing other services.
But she was concerned by Reserve Bank’s statement by just how much uncertainty they are seeing globally.
“That for me, underscores how important it is we have responsible, fiscal and economic management,” she said.
“We cannot take New Zealand’s economic recovery for granted – very good government is required right now.”
