New Zealand Holds Rates at 3.25%, Signals Possible Cut in August

The Reserve Bank of New Zealand (RBNZ) held its benchmark interest rate steady at 3.25% on Wednesday, citing ongoing near-term inflation risks. However, policymakers indicated that further rate cuts remain likely if inflation continues to ease as expected. This pause aligns with a Reuters poll, where 19 of 27 economists forecasted a hold following a 225-basis-point reduction since August 2024.

Despite inflation moderating to 2.5%, still within the RBNZ's 1–3% target range, concerns over global trade tensions and inflationary pressures have led the central bank to take a more cautious stance. Meeting minutes revealed that the bank anticipates its next rate cut could come in August, depending on updated economic data.

The RBNZ acknowledged uncertainty in the economic outlook, noting that future monetary policy will be influenced by inflation persistence, recovery pace, and the impact of tariffs. Elevated export prices and lower borrowing costs are supporting growth, but global headwinds, including slower international demand and fiscal tightening, are expected to weigh on New Zealand’s recovery.

Financial markets reacted with the New Zealand dollar falling 0.3% to $0.5977, while two-year swap rates held steady at 3.16%. Capital Economics’ senior APAC economist Abhijit Surya projected the terminal cash rate could fall to 2.5%, lower than the bank’s current estimate of 2.75%.

The RBNZ was among the first central banks to tighten policy post-COVID, raising rates by 525 basis points between 2021 and 2023. Those aggressive hikes pushed the economy into recession, though a fragile recovery is now underway. New Zealand’s rate cuts contrast with the U.S. Federal Reserve and Reserve Bank of Australia, both of which have adopted a more hawkish stance amid global economic uncertainty.