Hawks, doves and Kiwis

Some big swings in sentiment and markets in just a couple of months has led to expectations the RBNZ will drop the OCR at its meeting next week and signal another one or two to come.

Wednesday, May 21st 2025, 9:54AM

by Sally Lindsay

Some big swings in sentiment and markets in just a couple of months has led to expectations the RBNZ will drop the OCR at its meeting next week and signal another one or two to come.

Uncertainty around the path for US trade policy and New Zealand’s mixed economic data flow have led to this conclusion says Westpac’s economics team.

However, there are some big questions about the extent and timing of future rate cuts, and whether they are even required.

It has canvassed a selection of some of the most compelling hawkish and dovish arguments that might sway the direction of the RBNZ OCR in coming months.

Economic activity is gradually picking up but is still narrowly based and could be prone to set- backs.

The hawk’s view

We’re continuing to see large price increases in parts of the economy that are less exposed to competition, such as electricity and government charges, including local council rates. And with central and local government both signalling ongoing restraint in spending, the rising cost of providing services will continue to be reflected in higher costs for consumers (e.g. passport fees, charges for services). Inflation expectations have picked up again.
Notably the RBNZ’s own measure of expectations two years ahead posted a large 23 basis points (bps) rise in its latest survey, leaving it at 2.29%.
With large reductions in interest rates already working their way through the economy, additional cuts now could risk overstimulating demand, and that could require a sharper tightening cycle down the line.
There has already been a large reduction in borrowing costs. However, the full impact of those reductions is yet to be felt due to the degree of mortgage fixing.
Over the next six months, about half of all mortgages will come up for repricing, and many borrowers will be able to refix at much lower rates. Compared to this time last year, mortgage rates are about 170 to 200 bps lower.
As increasing numbers of borrowers come up for refixing over the coming months, many households will see a sizeable lift in their disposable incomes. This positive impulse is large relative to past easing cycles (outside the GFC period).
The downside risks for global growth are receding. It’s possible we’ll avoid a very sharp and disruptive downturn in global growth.
New Zealand might negotiate some concessions with regards to US trade access. It’s possible we may benefit from negotiations concluded with other strategically aligned nations to the extent these bring the floor on tariff rates down.

The dove’s tale

With the balance of supply and demand in the housing market leading to anaemic growth in house prices, the lack of positive wealth effects is also contributing to continued sluggishness in demand and softness in the construction sector.
Monetary policy settings need to be clearly stimulatory to drive a period of above-trend growth and a timely decline in the unemployment rate.
While returning the OCR to a broadly neutral rate of 3% (the RBNZ’s central estimate) should be sufficient to allow the economy to return to positive growth, given other factors influencing the economy it probably won’t be sufficient to generate the growth required to eliminate the negative output gap and ensure a timely return of the unemployment rate to the low 4s.
Fiscal policy is now entering a contractionary phase, with spending to remain restrained over the coming years and so decline as a share of GDP.
Trading partner growth is sub-par and is expected to remain so over 2026.
While improving commodity export earnings are boosting incomes in some regions, the exchange rate has depreciated much less than in some past easing cycles and so is providing less support to the broader export sector.

Tags: OCR OCR forecasts