The following is a guest editorial courtesy of Carolane de Palmas, Markets Analyst at Retail FX and CFDs broker ActivTrades.

A year ago, New Zealand’s Official Cash Rate (OCR) stood at 5.5%. Since then, the Reserve Bank of New Zealand (RBNZ) has pivoted sharply, cutting rates in response to falling inflation and a weakening labour market. Today’s decision to lower the OCR by another 25 basis points, bringing it to 3%, underscores the RBNZ’s focus on cushioning the economy against soft domestic demand and global uncertainty. The NZD lost more than 1% against the USD after the RBNZ decision, pushing the NZD/USD into oversold territory.

Daily NZD/USD Chart – Source: ActivTrades

The central bank remains cautious, balancing the risk of doing too little to support growth with the danger of loosening policy too quickly while inflation still lingers near the top of its target band. How far and how fast the easing cycle continues will depend on the pace of New Zealand’s recovery in the months ahead. Let’s take a closer look.

Inflation: A Temporary Bump on a Downward Path

Headline CPI inflation remains close to the upper end of the 1–3 percent target band at 2.7% during the June quarter (after 2.5% during the March quarter), but underlying pressures are easing as domestic demand softens and spare capacity builds in the economy. The RBNZ expects inflation to decline gradually, converging to the 2 percent midpoint by mid-2026.

In the short term, however, the outlook is complicated by a projected rise in annual inflation to around 3.0 percent in the September quarter—potentially breaching the target ceiling. The Committee emphasises that this spike reflects temporary factors and occurs too soon for monetary policy to meaningfully influence.

If inflation were to remain higher for longer, expectations could become unanchored, feeding into wage- and price-setting behaviour. For now, though, the central bank judges that inflation is broadly under control over the forecast horizon.

Growth: Recovery Stalls Under Global Tariff Pressure

While inflation is easing, growth has weakened considerably. The RBNZ estimates GDP contracted by 0.3 percent in the June quarter of 2025, after modest gains in the December 2024 and March 2025 quarters. High-frequency indicators point to subdued household spending, constrained business investment, and weak housing activity. Employment has softened, while elevated prices for essentials continue to squeeze real incomes.

The export sector has provided some relief, buoyed by strong dairy, meat, and horticulture prices. Yet the recovery is uneven: sectors tied to domestic demand remain under pressure, and global uncertainty is casting a long shadow. Trade restrictions and tariffs—particularly from the United States—pose a fresh risk. The effective tariff rate on New Zealand exports to the U.S. is now higher than anticipated, threatening more difficult conditions for exporters. Although short-term U.S. import demand ahead of tariff implementation temporarily boosted goods exports earlier this year, the medium-term trajectory is highly uncertain.

For now, the central bank of New Zealand assumes the June slowdown partly reflects temporary factors such as lower export volumes following earlier strength. Growth is expected to resume in the September quarter, supported by lower interest rates and stabilising global conditions. Even so, the balance of risks is tilted to the downside, with tariffs, weaker trading-partner growth, and fragile domestic demand all weighing on the outlook.

Housing Market: A Weak Link in the Recovery

Housing remains central to New Zealand’s economic outlook, not only as a driver of residential construction but also as a key component of household wealth and consumer confidence. Yet despite easier financial conditions and policy support, the sector has struggled to generate meaningful momentum in 2025.

According to Westpac’s July housing market update, house sales have risen by around 17 percent year-on-year, reflecting stronger activity under a lower interest rate environment. However, prices have lagged, increasing by just 1 percent in the first half of 2025. While demand has improved, it has been uneven and relatively muted. At the same time, supply has been more responsive than expected, tempering upward pressure on prices.

Several structural factors are weighing on housing demand. Rents have softened, with new rental agreements running at a negative annual rate, signalling weak underlying demand. Net migration remains below average, limiting population-driven housing pressure. In addition, concerns about global growth and broader domestic economic weakness are contributing to caution among prospective buyers.

For the RBNZ, the persistence of housing market weakness is notable because this sector is highly sensitive to interest rates and usually among the first to respond to monetary easing. Yet despite several rounds of cuts, residential construction, housing turnover, and retail activity linked to housing wealth have not shown the kind of rebound typically expected at this stage of the cycle. This suggests that the transmission of monetary policy into household balance sheets and spending is occurring more slowly than usual.

What to Expect Next from the RBNZ Now

The Reserve Bank has made clear that its easing cycle is not yet finished. Since August 2024, the Monetary Policy Committee has steadily lowered the Official Cash Rate as inflation pressures have eased and spare capacity has emerged in the economy. Private consumption has responded broadly in line with expectations, but residential investment—typically one of the most interest-rate-sensitive sectors—has remained weaker than anticipated, closely tied to sluggish house price growth.

Both the RBNZ and market economists expect further cuts to be delivered over the coming quarters. The central bank projects the OCR will decline to a lower level than previously assumed, reflecting softer GDP growth, subdued demand, and the need to ensure inflation returns to the 2 percent midpoint. Economists, meanwhile, see a risk that the RBNZ may need to go further than its own forecasts imply. ANZ’s chief economist Sharon Zollner, for instance, recently pulled forward her call for two additional cuts to October and November, citing weak domestic momentum and rising global risks.

While inflation may briefly touch the upper edge of the 1–3 percent band later this year, the medium-term trajectory is downward. Against this backdrop of subdued growth, weak housing demand, and global trade uncertainty, the balance of risks continues to tilt toward providing more monetary support. The RBNZ’s message is clear: lower interest rates remain the main lever to stabilise activity and ensure inflation settles comfortably at target over the medium term.

Sources: Wall Street Journal, RBNZ, WestPac

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