New Zealand announces sixth consecutive rate cut as global trade risks cloud recovery

New Zealand’s central bank has lowered its benchmark interest rate by 25 basis points to 3.25 per cent, marking its sixth cut in a row and signalling a deeper-than-previously-expected easing cycle as global economic risks, especially from escalating US trade tensions, continue to weigh on the country’s fragile recovery.

The decision by the Reserve Bank of New Zealand’s (RBNZ) Monetary Policy Committee (MPC) was supported by five of the six members, with one voting to keep the official cash rate (OCR) at 3.50 per cent. The move was widely anticipated by markets and aligns with recent forecasts from economists, who have pointed to growing international uncertainty and spare capacity in the domestic economy.

In its May 2025 Monetary Policy Statement, the RBNZ said, “Inflation is within the target band, and the committee is well placed to respond to domestic and international developments to maintain price stability over the medium term.”

Weaker global outlook

The RBNZ highlighted several downside risks to growth, notably the surge in global protectionism, particularly from the United States. US President Donald Trump’s recent escalation of tariffs has dampened demand expectations across global markets and complicated the outlook for export-driven economies like New Zealand.

Projections for global growth, especially in key trading partners like China and the US, have been revised down. The central bank warned that heightened policy uncertainty and supply chain disruptions from geopolitical fragmentation could suppress investment and consumption worldwide, leading to reduced demand for New Zealand’s exports.

“The announced increase in US tariffs will lower global demand for New Zealand’s exports, particularly from Asia, constraining domestic growth,” the RBNZ stated.

Domestic recovery remains fragile

Although the New Zealand economy has begun recovering after last year’s contraction, growth remains tepid. The bank noted that high commodity prices and past rate cuts are supporting activity, but spare capacity remains. Nominal wage growth has slowed, companies are finding it easier to hire workers, and business investment has yet to pick up meaningfully.

Inflation data offered mixed signals. Annual consumer price inflation rose to 2.5 per cent in the March quarter, within the RBNZ’s 1-3 per cent target band, and is projected to increase slightly to 2.7 per cent in Q3 due to higher food and energy prices. However, measures of core inflation are declining, and inflation expectations, while rising, remain anchored in the medium term.

The central bank now forecasts the OCR will fall to 2.92 per cent by the end of 2025 and to 2.85 per cent in the first quarter of 2026—lower than its February projections. Some market participants believe the cash rate could drop as far as 2.75 per cent if inflation remains subdued and external risks escalate.

Financial system remains stable

Despite recent economic turbulence, the RBNZ said the financial system is stable. Lower wholesale rates have begun to translate into reduced mortgage and deposit rates, and banks remain well capitalised. Nearly half of all mortgages are due to reprice in the coming months, offering households further relief.

The bank acknowledged that monetary policy will remain responsive to both domestic developments and shifting global dynamics, particularly if protectionist measures persist. “There is significant uncertainty about how global tariffs will transmit to New Zealand’s economy,” it said, emphasising that policy decisions will be guided by inflation outcomes and broader financial stability considerations.

With inflation moderating and economic headwinds building, New Zealand’s central bank appears poised to maintain an easing bias and, if necessary, continue rate cuts to support its recovery and safeguard price stability amid a turbulent global backdrop.