The Reserve Bank of New Zealand's interest rate decision and meeting minutes are in full! An unexpected 50 basis point rate cut sent the New Zealand dollar plummeting to a six-month low.
2025-10-08 09:20:28
On Wednesday (October 8th), the Reserve Bank of New Zealand unexpectedly cut interest rates by 50 basis points to 2.5%, exceeding market expectations for a 25 basis point cut. This caused the New Zealand dollar to plummet nearly 60 points against the US dollar. As of 09:08, it hit a low of 0.5740, a drop of approximately 0.98%, a new low since April 11th. Below is the full text of the Reserve Bank of New Zealand's interest rate decision and the minutes of the meeting.
The minutes of the Monetary Policy Committee meeting summarised the committee's discussions, which culminated in the decision to cut the Official Cash Rate (OCR) to 2.5%.
Current annual Consumer Price Index (CPI) inflation is near the upper limit of the Monetary Policy Committee's 1% to 3% target range. However, due to spare capacity in the economy, inflation is expected to decline to the mid-point of the 2% target in the first half of 2026.
Economic activity remains subdued through mid-2025, partly due to supply constraints on goods and services in some domestic sectors and global economic policy uncertainty. Household consumption is recovering, partly thanks to lower interest rates, and high commodity prices continue to support primary industries. House prices remain flat, and residential and business investment remain weak .
Economic growth among New Zealand's trading partners has shown resilience, partly due to strong investment in AI-related activities, but growth is expected to slow in 2026.
New Zealand's inflation outlook faces both upside and downside risks. Cautious behavior by households and businesses could slow the economic recovery, reducing medium-term inflationary pressures. On the other hand, recent higher inflation could become more persistent.
Taking all factors into consideration, the Committee unanimously agreed to reduce the OCR by 50 basis points to 2.5%. The Committee remains open to further reductions in the OCR to ensure that inflation is sustainably stable around the 2% mid-point of its target over the medium term .
Annual Consumer Price Index (CPI) inflation remains within the Monetary Policy Committee's target range of 1% to 3%. Although inflation is currently near the upper limit of this range, spare capacity suggests that headline inflation will return to the mid-point of the target in the first half of 2026.
Annual CPI inflation is expected to move towards the target midpoint
The Committee, taking into account all economic developments relevant to its medium-term inflation objective, projects that annual CPI inflation will move toward the midpoint of its target range in the first half of next year as tradable goods inflationary pressures recede and spare capacity continues to moderate domestically generated inflation.
The Committee noted that overall inflation is projected to reach 3.0% in the third quarter of 2025, reflecting significant increases in administrative prices, food prices, and prices of other tradable goods and services. Excluding the impact of administrative prices, quarterly non-tradable goods inflation has continued to decline and is at a level consistent with price stability.
There is significant spare capacity in the domestic economy
The Committee discussed the larger-than-expected contraction in gross domestic product (GDP) in the second quarter of 2025. The Committee noted that the weakness in the headline reading was due to an unusually large seasonal balancing item, which was expected to reverse during the year and had no significant implications for monetary policy.
Furthermore, some industry-specific factors may be constraining supply. For example, high milk prices and adverse weather conditions may lead to increased livestock retention and reduced meat production. Limited domestic energy sources and high energy prices may also put further pressure on the manufacturing sector. These factors reflect a decline in supply capacity rather than weak demand.
The Committee therefore adjusted its assessment of current spare capacity only slightly, although the new data suggest some downside risks.
Timelier indicators suggest a slight recovery in economic activity in the September quarter, but significant spare capacity remains in the New Zealand economy.
Lower interest rates will support economic growth
The Committee discussed the transmission of monetary policy. Since the August Statement, wholesale interest rates have fallen, particularly short-term rates. This has led to lower interest rates on business loans, mortgages, and term deposits, supporting new borrowing and investment. The average interest rate on existing mortgages is expected to continue to decline over the coming year as mortgage holders refix their loans at lower rates, reducing debt servicing costs for households.
The Committee discussed the outlook for interest rate-sensitive areas of the economy. Slow growth in disposable income and house prices continues to weigh on economic activity, but lower interest rates are supporting a recovery in consumption. Construction activity is projected to recover from mid-2026 as demand for housing rebounds and house price growth resumes. The Committee expects this to reduce spare capacity in the economy and support increased business investment, despite a decline in export prices from high levels and a decline in government spending as a share of the economy.
Growth among trading partners remains resilient but is expected to slow
The Committee discussed the impact of trade restrictions and tariffs on the global economy. Global trade volumes and economic activity have thus far proven resilient. Growth forecasts for many trading partners have been revised upwards for 2025, particularly for China and some other Asian economies. This reflects increased investment in AI-related industries, the adaptation of trade flows and global supply chains to new tariffs and trade restrictions, and accommodative fiscal and monetary policies in some economies. However, the projected recovery in growth for 2026 is less pronounced, with slower growth expected among trading partners.
Global inflation continues to decline through 2025. Inflation in Asia is particularly low, with negative inflation even occurring in China. Headline inflation in the United States has risen, but evidence suggests that the pass-through of tariffs to consumer prices has been lower than expected. Currently, there is no clear evidence of the impact of tariffs on New Zealand's import and export prices. The Committee continues to expect that the overall net effect of global tariffs on the New Zealand economy will be deflationary.
New Zealand's weaker economic activity relative to other economies has led to a lower exchange rate. This, combined with higher commodity export prices, has provided short-term support to the domestic economy, particularly in rural and export regions. If the exchange rate remains low, it could limit the pass-through of lower international import commodity prices to New Zealand.
The global growth outlook faces both upside and downside risks
The Committee discussed both upside and downside risks to inflationary pressures in New Zealand from recent global developments. On the upside, global economic activity has been stronger than expected, and uncertainty indicators have declined. In the short term, strong global demand and a lower New Zealand dollar could provide more-than-expected support to New Zealand exports and economic growth, while pushing up inflation.
On the downside, there are uncertainties about the sustainability of elevated equity prices and increased investment in AI technology. Furthermore, heightened political and institutional uncertainty in some economies, as well as geopolitical risks, could lead to higher term premiums and increased volatility in bond markets. Furthermore, the strong global growth in 2025 may simply reflect differences in the timing, rather than the extent, of the negative impact of trade restrictions on growth.
Domestic inflationary pressures face both upside and downside risks
The Committee discussed upside risks to domestic inflation. Businesses continue to face cost pressures from administrative prices (such as council rates) and some energy bills. The Committee expects inflation to reach 3.0% in the September quarter. Due to two-way uncertainty inherent in any forecast, there is a possibility that inflation may exceed the target range in the September quarter. If inflation persists above expectations, this could affect medium-term inflation expectations, as well as wage and price-setting behavior.
The Committee discussed the risk that potential output growth could be slower than currently anticipated. Subdued investment, weak productivity, and subdued population growth through net migration are restraining potential output growth. This limits the pace of growth the economy can sustain without generating additional inflationary pressures. In an environment of supply constraints, inflation is likely to remain elevated as demand recovers.
The Committee discussed downside risks to domestic demand and inflation. Excessive caution among households and businesses could dampen consumption and investment more than currently assumed. Declines in short-term interest rates may not be sufficient to support growth. Borrowing and investment decisions are influenced by the entire yield curve, and the decline in the five-year rate has not been as large as that in short-term rates.
The committee agreed to cut the OCR by 50 basis points to 2.5%.
In light of recent economic developments and the balance of risks, the Committee discussed the option of reducing the OCR by either 25 basis points or 50 basis points at this meeting.
The rationale for a 25 basis point cut emphasized that past OCR cuts were still being transmitted through the economy, with consumption and employment growth showing signs of recovery. Some members noted that supply constraints and cost pressures on businesses posed upside risks to inflation. Financial conditions are influenced by the current level of the OCR and the expected future path. A 25 basis point cut at this meeting, coupled with a hint of possible further easing in November, would likely be sufficient to achieve a sustained economic recovery while providing the Committee with confidence that inflation will converge quickly towards the 2% midpoint of its target.
The rationale for a 50 basis point cut emphasized persistent slack and the downside risks it poses to medium-term activity and inflation. Domestic inflationary pressures continued to moderate, as expected, giving the Committee greater confidence that they were contained. Some members were more concerned about the risk that excessive caution among households and businesses would lead to persistently weak economic activity and employment. A larger reduction in the OCR could mitigate this risk by providing a clear signal of support for consumption and investment.
Taking all these considerations into account, the Committee unanimously agreed to reduce the OCR by 50 basis points to 2.5% on Wednesday, 8 October 2025. The Committee remains open to further reductions in the OCR to ensure that inflation is sustainably stable around the mid-point of its 2% target over the medium term.
(NZD/JPY 5-minute chart, source: Yihuitong)
At 09:15 Beijing time, the New Zealand dollar was trading at 0.5745/46 against the US dollar.
Full text of interest rate decision
The minutes of the Monetary Policy Committee meeting summarised the committee's discussions, which culminated in the decision to cut the Official Cash Rate (OCR) to 2.5%.
Current annual Consumer Price Index (CPI) inflation is near the upper limit of the Monetary Policy Committee's 1% to 3% target range. However, due to spare capacity in the economy, inflation is expected to decline to the mid-point of the 2% target in the first half of 2026.
Economic activity remains subdued through mid-2025, partly due to supply constraints on goods and services in some domestic sectors and global economic policy uncertainty. Household consumption is recovering, partly thanks to lower interest rates, and high commodity prices continue to support primary industries. House prices remain flat, and residential and business investment remain weak .
Economic growth among New Zealand's trading partners has shown resilience, partly due to strong investment in AI-related activities, but growth is expected to slow in 2026.
New Zealand's inflation outlook faces both upside and downside risks. Cautious behavior by households and businesses could slow the economic recovery, reducing medium-term inflationary pressures. On the other hand, recent higher inflation could become more persistent.
Taking all factors into consideration, the Committee unanimously agreed to reduce the OCR by 50 basis points to 2.5%. The Committee remains open to further reductions in the OCR to ensure that inflation is sustainably stable around the 2% mid-point of its target over the medium term .
Summary of the October 2025 Meeting Minutes
Annual Consumer Price Index (CPI) inflation remains within the Monetary Policy Committee's target range of 1% to 3%. Although inflation is currently near the upper limit of this range, spare capacity suggests that headline inflation will return to the mid-point of the target in the first half of 2026.
Annual CPI inflation is expected to move towards the target midpoint
The Committee, taking into account all economic developments relevant to its medium-term inflation objective, projects that annual CPI inflation will move toward the midpoint of its target range in the first half of next year as tradable goods inflationary pressures recede and spare capacity continues to moderate domestically generated inflation.
The Committee noted that overall inflation is projected to reach 3.0% in the third quarter of 2025, reflecting significant increases in administrative prices, food prices, and prices of other tradable goods and services. Excluding the impact of administrative prices, quarterly non-tradable goods inflation has continued to decline and is at a level consistent with price stability.
There is significant spare capacity in the domestic economy
The Committee discussed the larger-than-expected contraction in gross domestic product (GDP) in the second quarter of 2025. The Committee noted that the weakness in the headline reading was due to an unusually large seasonal balancing item, which was expected to reverse during the year and had no significant implications for monetary policy.
Furthermore, some industry-specific factors may be constraining supply. For example, high milk prices and adverse weather conditions may lead to increased livestock retention and reduced meat production. Limited domestic energy sources and high energy prices may also put further pressure on the manufacturing sector. These factors reflect a decline in supply capacity rather than weak demand.
The Committee therefore adjusted its assessment of current spare capacity only slightly, although the new data suggest some downside risks.
Timelier indicators suggest a slight recovery in economic activity in the September quarter, but significant spare capacity remains in the New Zealand economy.
Lower interest rates will support economic growth
The Committee discussed the transmission of monetary policy. Since the August Statement, wholesale interest rates have fallen, particularly short-term rates. This has led to lower interest rates on business loans, mortgages, and term deposits, supporting new borrowing and investment. The average interest rate on existing mortgages is expected to continue to decline over the coming year as mortgage holders refix their loans at lower rates, reducing debt servicing costs for households.
The Committee discussed the outlook for interest rate-sensitive areas of the economy. Slow growth in disposable income and house prices continues to weigh on economic activity, but lower interest rates are supporting a recovery in consumption. Construction activity is projected to recover from mid-2026 as demand for housing rebounds and house price growth resumes. The Committee expects this to reduce spare capacity in the economy and support increased business investment, despite a decline in export prices from high levels and a decline in government spending as a share of the economy.
Growth among trading partners remains resilient but is expected to slow
The Committee discussed the impact of trade restrictions and tariffs on the global economy. Global trade volumes and economic activity have thus far proven resilient. Growth forecasts for many trading partners have been revised upwards for 2025, particularly for China and some other Asian economies. This reflects increased investment in AI-related industries, the adaptation of trade flows and global supply chains to new tariffs and trade restrictions, and accommodative fiscal and monetary policies in some economies. However, the projected recovery in growth for 2026 is less pronounced, with slower growth expected among trading partners.
Global inflation continues to decline through 2025. Inflation in Asia is particularly low, with negative inflation even occurring in China. Headline inflation in the United States has risen, but evidence suggests that the pass-through of tariffs to consumer prices has been lower than expected. Currently, there is no clear evidence of the impact of tariffs on New Zealand's import and export prices. The Committee continues to expect that the overall net effect of global tariffs on the New Zealand economy will be deflationary.
New Zealand's weaker economic activity relative to other economies has led to a lower exchange rate. This, combined with higher commodity export prices, has provided short-term support to the domestic economy, particularly in rural and export regions. If the exchange rate remains low, it could limit the pass-through of lower international import commodity prices to New Zealand.
The global growth outlook faces both upside and downside risks
The Committee discussed both upside and downside risks to inflationary pressures in New Zealand from recent global developments. On the upside, global economic activity has been stronger than expected, and uncertainty indicators have declined. In the short term, strong global demand and a lower New Zealand dollar could provide more-than-expected support to New Zealand exports and economic growth, while pushing up inflation.
On the downside, there are uncertainties about the sustainability of elevated equity prices and increased investment in AI technology. Furthermore, heightened political and institutional uncertainty in some economies, as well as geopolitical risks, could lead to higher term premiums and increased volatility in bond markets. Furthermore, the strong global growth in 2025 may simply reflect differences in the timing, rather than the extent, of the negative impact of trade restrictions on growth.
Domestic inflationary pressures face both upside and downside risks
The Committee discussed upside risks to domestic inflation. Businesses continue to face cost pressures from administrative prices (such as council rates) and some energy bills. The Committee expects inflation to reach 3.0% in the September quarter. Due to two-way uncertainty inherent in any forecast, there is a possibility that inflation may exceed the target range in the September quarter. If inflation persists above expectations, this could affect medium-term inflation expectations, as well as wage and price-setting behavior.
The Committee discussed the risk that potential output growth could be slower than currently anticipated. Subdued investment, weak productivity, and subdued population growth through net migration are restraining potential output growth. This limits the pace of growth the economy can sustain without generating additional inflationary pressures. In an environment of supply constraints, inflation is likely to remain elevated as demand recovers.
The Committee discussed downside risks to domestic demand and inflation. Excessive caution among households and businesses could dampen consumption and investment more than currently assumed. Declines in short-term interest rates may not be sufficient to support growth. Borrowing and investment decisions are influenced by the entire yield curve, and the decline in the five-year rate has not been as large as that in short-term rates.
The committee agreed to cut the OCR by 50 basis points to 2.5%.
In light of recent economic developments and the balance of risks, the Committee discussed the option of reducing the OCR by either 25 basis points or 50 basis points at this meeting.
The rationale for a 25 basis point cut emphasized that past OCR cuts were still being transmitted through the economy, with consumption and employment growth showing signs of recovery. Some members noted that supply constraints and cost pressures on businesses posed upside risks to inflation. Financial conditions are influenced by the current level of the OCR and the expected future path. A 25 basis point cut at this meeting, coupled with a hint of possible further easing in November, would likely be sufficient to achieve a sustained economic recovery while providing the Committee with confidence that inflation will converge quickly towards the 2% midpoint of its target.
The rationale for a 50 basis point cut emphasized persistent slack and the downside risks it poses to medium-term activity and inflation. Domestic inflationary pressures continued to moderate, as expected, giving the Committee greater confidence that they were contained. Some members were more concerned about the risk that excessive caution among households and businesses would lead to persistently weak economic activity and employment. A larger reduction in the OCR could mitigate this risk by providing a clear signal of support for consumption and investment.
Taking all these considerations into account, the Committee unanimously agreed to reduce the OCR by 50 basis points to 2.5% on Wednesday, 8 October 2025. The Committee remains open to further reductions in the OCR to ensure that inflation is sustainably stable around the mid-point of its 2% target over the medium term.
(NZD/JPY 5-minute chart, source: Yihuitong)
At 09:15 Beijing time, the New Zealand dollar was trading at 0.5745/46 against the US dollar.
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