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New Zealand’s economy contracted more than expected in the second quarter of 2025, intensifying pressure on the Reserve Bank of New Zealand (RBNZ) to deliver a sharper rate cut next month. Official data released Thursday showed gross domestic product (GDP) fell 0.9% quarter-on-quarter, compared with forecasts of a 0.3% decline from both analysts and the central bank.
The economy has now contracted in three of the past five quarters, signaling persistent weakness. Annual GDP dropped 0.6%, against expectations of flat growth, highlighting the depth of the slowdown. The construction industry remained in decline, while manufacturing output and professional services also posted losses.
Markets quickly priced in steeper monetary easing. Two-year swap rates slid 10 basis points to 2.7290%, their lowest since early 2022. The New Zealand dollar fell 0.5% to $0.5932, retreating from an overnight peak of $0.6007. Investors now anticipate 58 basis points of cuts to the official cash rate (OCR), compared with 48 basis points before the data. Odds of a 50-basis-point cut in October have climbed to 20%.
Westpac senior economist Michael Gordon noted that the weaker-than-expected GDP outcome would “encourage the RBNZ in its intentions to cut the OCR further this year.”
The central bank had already signaled two more rate cuts in 2025, pointing to sluggish household and business spending, rising essential costs, falling employment, and weakening house prices. New Zealand slipped into a technical recession in late 2024 before posting sluggish growth in early 2025, leaving policymakers under pressure to revive demand.
With the latest figures underscoring deeper-than-expected economic stress, markets and analysts increasingly expect the RBNZ to act more aggressively to support growth.
