The Reserve Bank of New Zealand (RBNZ) has reduced the Official Cash Rate (OCR) by 50 basis points to 2.5 percent, following its 8th of October 2025 Monetary Policy Committee (MPC) meeting. This decision reflects the Bank’s commitment to supporting domestic economic activity while guiding inflation back toward the 2 percent target mid-point by the first half of 2026.

Inflation nears target, but pressures remain

The Annual Consumer Price Index (CPI) inflation is currently near the top of the RBNZ’s 1–3 percent target band. Headline CPI inflation reached 3.0 percent in the September 2025 quarter, largely due to higher administered prices, food costs and prices of tradable goods. However, excluding these factors, non-tradables inflation has continued to decline, remaining consistent with price stability. The MPC expects CPI inflation to converge to the target mid-point as tradables inflation pressures ease and spare capacity moderates.

Domestic economic activity shows modest recovery

Economic growth in New Zealand has been relatively weak through the middle of 2025. Contributing factors include domestic supply constraints in certain industries, global economic policy uncertainty, and seasonal fluctuations in GDP. Household consumption is slowly recovering, supported by lower interest rates, while elevated commodity prices continue to benefit the primary sector. Residential and business investment remain subdued and house prices are generally flat.

The Reserve Bank noted that spare capacity in the economy remains significant, particularly in manufacturing and construction sectors affected by energy limitations and unfavourable weather conditions. Despite these challenges, timely indicators suggest a modest recovery in economic activity during the September quarter.

Global Outlook: Resilient but slowing growth

Growth among New Zealand’s trading partners has remained resilient in 2025, supported by strong investment in AI-related industries and adaptation to new trade restrictions. While this has helped maintain demand for New Zealand exports, growth is expected to slow in 2026. Global inflation trends also remain subdued, particularly in Asia, with some economies even experiencing negative inflation. These conditions, alongside a lower New Zealand dollar, provide near-term support for exports and domestic growth.

Balancing risks to inflation

The MPC highlighted both upside and downside risks to domestic inflation. On the upside, resilient global demand and low interest rates may boost consumption, investment, and exports, potentially increasing inflation pressures. On the downside, cautious behaviour by households and businesses could slow the economic recovery, keeping medium-term inflation subdued. Cost pressures on businesses, such as local council rates and energy charges, may also influence inflation expectations if they persist.

Lower interest rates to support recovery

The 50-basis-point OCR reduction is designed to stimulate borrowing, investment and consumption. Lower interest rates will reduce mortgage servicing costs for households and make business lending more accessible. The Reserve Bank expects these measures to encourage growth in construction activity, dwelling demand and business investment from mid-2026, gradually reducing spare capacity and supporting the economy’s recovery.

Looking ahead

The Reserve Bank remains open to further OCR adjustments if required to ensure inflation stabilises sustainably around the 2 percent target mid-point. By carefully balancing support for growth with medium-term price stability, the MPC aims to provide a clear path for households, businesses and investors in an environment of ongoing global and domestic uncertainty.

The OCR cut reflects the Bank’s proactive approach to stimulating the New Zealand economy, supporting recovery and maintaining confidence that inflation will settle at the desired target over the medium term.