RBNZ cuts OCR to 3% after economy stalls in Q2, inflation expected to ease by 2026

The Reserve Bank of New Zealand (RBNZ) has lowered the Official Cash Rate (OCR) by 25 basis points to 3 per cent, citing subdued domestic activity, easing inflation pressures, and spare capacity in the economy.

The decision, announced on August 20 in the Monetary Policy Statement, was made by a majority of the Monetary Policy Committee (MPC), with four members voting in favour of the cut and two preferring a steeper reduction to 2.75 percent.

Inflation back toward mid-point target

Annual consumer price index (CPI) inflation currently sits at 2.7 percent and is expected to briefly peak at 3 percent in the September quarter due to higher food and administered prices.

However, the RBNZ projects headline inflation will return to around the 2 percent midpoint of its 1–3 percent target band by mid-2026.

While non-tradables inflation has been declining and core measures remain within target, near-term household inflation expectations have risen, partly reflecting global factors such as energy costs and trade restrictions.

Economy stalled in the second quarter

The bank noted that New Zealand’s economic recovery stalled in the second quarter of 2025, with household and business spending constrained by global policy uncertainty, weaker employment, falling house prices, and higher essential costs.

The RBNZ said there are both upside and downside risks to the outlook. A more cautious approach by households and businesses could further weaken growth, while recent interest rate reductions could accelerate the recovery once fully transmitted through the economy.

Why was the OCR cut

The MPC weighed three policy options: holding the OCR at 3.25 percent, cutting by 25 basis points, or cutting by 50 basis points.

The majority opted for a 25 basis point reduction, describing it as a balanced approach between the risks of slowing growth and still-elevated near-term inflation.

One member argued for holding rates steady to monitor incoming data, while others favoured a larger cut to send a stronger signal of support for the economy.

The RBNZ indicated that further reductions remain possible: “If medium-term inflation pressures continue to ease as expected, there is scope to lower the OCR further,” the statement said.