Media release
The Monetary Policy Committee today agreed to hold the Official Cash Rate at 3.25 percent.
Annual consumers price inflation will likely increase towards the top of the Monetary Policy Committee's 1 to 3 percent target band over mid-2025. However, with spare productive capacity in the economy and declining domestic inflation pressures, headline inflation is expected to remain in the band and return to around 2 percent by early 2026.
Elevated export prices and lower interest rates are supporting a recovery in the New Zealand economy. However, heightened global policy uncertainty and tariffs are expected to reduce global economic growth. This will likely slow the pace of New Zealand's economic recovery, reducing inflation pressures.
The economic outlook remains highly uncertain. Further data on the speed of New Zealand's economic recovery, the persistence of inflation, and the impacts of tariffs will influence the future path of the Official Cash Rate.
If medium-term inflation pressures continue to ease as projected, the Committee expects to lower the Official Cash Rate further.
Summary Record of Meeting - July 2025
Annual consumers price index inflation remains within the Monetary Policy Committee's 1 to 3 percent target band. While inflation is expected to approach the top of the target band in Q2 and Q3 of 2025, spare productive capacity and declining core inflation are consistent with headline inflation returning to the midpoint over the medium term. The Committee noted that the outlook for medium-term inflation pressures in New Zealand has evolved broadly in line with the May MPS projections. The pace of recovery in domestic consumption and investment remains weak, reflecting heightened caution in the face of global policy shocks and uncertainty. But strong export prices and recent monetary policy easing are expected to support the economic recovery.
Global economic growth is expected to weaken
Global growth is expected to slow over the second half of 2025, reflecting the uncertain consequences of trade protectionism. However, the Committee noted that fiscal expansion in the euro area, the US, and China may counter some of the downside risks.
On balance, increased protectionism is expected to result in less inflationary pressure for New Zealand. While tariffs are likely to be inflationary in the US, forecasts for inflation in China and emerging Asia have been lowered recently, partly reflecting an appreciation in some Asian currencies.
The Committee discussed recent developments in global financial markets. Weaker investor sentiment for US dollar assets has contributed to rising term premia in the bond market and depreciation of the US dollar. Rising term premia in the US, and global fiscal expansion, have contributed to higher long-term bond yields in other advanced economies.
Domestic financial conditions have continued to ease
The Committee noted that, despite global factors, domestic financial conditions are evolving broadly as expected. Mortgage and deposit interest rates have continued to decline, reflecting a lower OCR, strong bank liquidity, and soft credit growth. The average interest rate on the stock of mortgages is expected to continue to decline in coming quarters as more mortgage holders refix at lower one to two year fixed-term interest rates. Close to half the stock of mortgages is due to reprice during the September and December 2025 quarters.
Domestic economic activity is expected to gradually recover
In aggregate, GDP growth over the December and March quarters was stronger than expected, reflecting a pick-up in household consumption and business investment. But higher frequency indicators suggest weaker than expected growth in April and May. Taken together, this suggests the current level of economic activity is broadly consistent with the Committee's judgement in May. Overall, there remains significant spare capacity in the New Zealand economy. Higher export prices and monetary policy easing should contribute to a gradual recovery in economic activity.
Inflation is expected to rise towards the top of the target band in mid-2025
Annual consumers price index inflation increased to 2.5 percent in the March 2025 quarter. Inflation is expected to increase further in the June and September quarters, towards the top of the MPC's inflation target band. The near-term increase in inflation is due to a pick-up in food prices and elevated administered price increases. Inflation is expected to fall over late 2025 and return to around the mid-point of the target band by early 2026, as significant spare capacity in the economy further reduces domestic inflation pressures.
Risks to the global outlook remain elevated
The Committee discussed several key risks around the economic outlook. There remains significant uncertainty about global tariff policy, and how this will affect the global economy. As outlined in the alternative scenarios in the May MPS, recently announced tariffs could result in higher or lower medium-term inflation pressure for New Zealand than assumed in the central scenario. The costs of trade could increase by more than assumed as global supply chains adapt to trade barriers, increasing inflationary pressure. Conversely, policy uncertainty could lower global investment, and trade diversion could lower import prices by more than currently assumed, lowering inflation pressure.
The Committee noted the risk that large economic policy shifts overseas, and concerns about sovereign risk, could result in additional financial market volatility and increased bond yields. Conflict in the Middle East and Ukraine has contributed to volatility and heightened uncertainty around global energy prices. A re-escalation in conflict would present upside risk to energy prices. However, increased oil supply from OPEC could mitigate this risk.
The domestic economic outlook remains uncertain
The Committee noted uncertainty about the speed with which the domestic economy would continue recovering. Some members highlighted that prolonged economic uncertainty might induce further precautionary behaviour by households and firms. Such actions risk becoming mutually reinforcing and weigh on aggregate demand, slowing the economic recovery. The recent weaker than expected higher frequency indicators could be consistent with this.
In contrast, other members emphasised stronger household consumption and business investment in the March quarter, along with higher surveyed investment intentions in the June quarter, as possible signals of a recovery in interest rate sensitive parts of the economy.
The Committee noted that there were upside and downside risks to the medium-term outlook for inflation. With higher inflation expected in the near term, some members underlined a risk that this could lead to more persistently elevated price- and wage-setting behaviour. Members also discussed the risk that administered price inflation could remain high for a prolonged period. However, other members emphasised the large negative output gap, moderate wage inflation and job insecurity, and continued weakness in house prices. Together with the broad-money-to-nominal-GDP ratio being well below its pre-pandemic trend, this could provide confidence that inflationary pressures remain contained.
The Committee agreed to hold the OCR at 3.25 percent
The Committee discussed the options of cutting the OCR by 25 basis points to 3 percent or keeping the OCR on hold at 3.25 percent at this meeting.
The case for lowering the OCR at this meeting highlighted weak near-term growth momentum and the risk of prolonged weakness in economic activity from excess caution by households and businesses in the face of economic uncertainty. This could lead to downward pressure on medium-term inflation. Some members emphasised that further monetary easing in July would provide a guardrail to ensure the recovery of economic activity, whilst being consistent with price stability.
The case for keeping the OCR on hold at this meeting highlighted the elevated level of uncertainty, and the benefits of waiting until August in light of near-term inflation risks. Some members emphasised that waiting would allow the Committee to assess whether weakness in the domestic economy persists, and how inflation and inflation expectations evolve. It would also allow more time to observe developments in the global economy.
On Wednesday 9 July, the Committee reached consensus to hold the OCR at 3.25 percent.
Subject to medium-term inflation pressures continuing to ease in line with the Committee's central projections, the Committee expects to lower the Official Cash Rate further, broadly consistent with the projection outlined in May.
Attendees
Members of MPC: Christian Hawkesby (Chair), Bob Buckle, Carl Hansen, Karen Silk, Paul Conway, Prasanna Gai
Treasury Observer: Dominick Stephens
MPC Secretaries: Chris Bloor, Evelyn Truong
