The Reserve Bank’s latest Official Cash Rate (OCR) decision was a deliberate message to households that it would not tolerate any more spare capacity in the economy, even at the risk of letting inflation break above 3%.

Businesses weighing investments or households considering purchases can be confident the central bank will step in to support the economy and stamp out any signs of weakness. 

It is a Kiwi version of the Greenspan Put. The 1990s idea that the US Federal Reserve would step in to rescue markets whenever they fell, giving investors confidence they wouldn’t face major losses.

The Reserve Bank’s Monetary Policy Committee explicitly aimed to grab attention with a 50 basis point rate cut on Wednesday, despite believing the economy hadn’t deteriorated much since August.

It assessed economic activity through the middle of 2025 had been weak, as expected, but partly due to supply constraints and uncertainty, rather than a lack of actual demand.

Expensive energy, high milk prices, and unfavourable weather hit production and manufacturing. But household consumption was recovering and elevated commodity prices were supporting growth in the primary sector.

“Consequently, the Committee has revised its assessment of current spare capacity only marginally in response to new GDP and activity data, but note that the new data imply some downside risk,” the Reserve Bank said. 

“More timely indicators suggest that economic activity recovered modestly in the September quarter, but there remains significant spare capacity in the New Zealand economy.”

That assessment of the economy might cause you to think the policymakers had opted for a small rate cut, or even a pause — considering inflation is at the top of the target band. 

But you’d be wrong. The committee cut interest rates 50 basis points to 2.50% and said they were willing to do so again if needed. 

“Some members continue to put relatively more weight on the risk that excess precaution by households and businesses and, therefore, subdued economic activity and employment persists. A larger reduction in the OCR could mitigate this risk by providing a clear signal that supports consumption and investment.”

“The Committee remains open to further reductions in the OCR as required for inflation to settle sustainably near the 2 percent target mid-point in the medium term,” the Reserve Bank said. 

Translation: The Reserve Bank will sort out any economic underperformance, so get busy spending.

 

Playing with fire

Dave McLeish, a veteran bond investor and managing director of Wedge, said there was little historical precedent for the Reserve Bank to cut rates 50 basis points while inflation was at 3%. 

The only examples are during the Global Financial Crisis and immediately after the Christchurch Earthquakes when inflation was artificially high due to a GST increase.

“This decision was much more economy-focused than inflation-focused,” he said, noting it was hard to square with the Bank’s inflation mandate. 

The Reserve Bank was relying on uncertain and unreliable forecasts of low inflation to justify aggressive rate cuts today, without making a strong argument that the economy had weakened much. 

“A cut of this size might ease the pain today but deepen the problem tomorrow. Rate cuts of this size and warm inflation don’t mix in my opinion,” McLeish said.

Government ministers Nicola Willis and David Seymour, who advocated for the Reserve Bank to focus only on price stability, were unbothered by the Reserve Bank’s decision to ignore inflation and welcomed the rate cuts.

Seymour said he was “happy” with inflation at 3% and Willis said it was okay for the central bank to “tolerate a fluctuation” above target as long as it didn’t last three years. 

“Were there to be a very short term fluctuation in inflation above 3% they think there’s enough capacity in the economy that it would come back down,” Willis told reporters. 

Kelly Eckhold, Westpac NZ’s chief economist, said the Reserve Bank was completely unconcerned about inflation and saw the greater risk as too much spare capacity in the economy.

While the Bank’s record of meeting downplayed recent weak data, he said it was clear policymakers had taken a negative signal from it and were not willing to ignore it.

The Reserve Bank’s August Monetary Policy Statement noted there was already plenty of excess capacity and that the Bank would act to prevent it from widening.

Two committee members voted for a 50-basis-point cut at that meeting and likely convinced the other four they’d been right the first time, Eckhold said. 

 

Easing cycle continues

Economists at Kiwibank said they now saw potential for the OCR to be cut to 2% in February and were forecasting a move to 2.25% in November. 

“We don’t think the easing cycle is over yet. And the Reserve Bank is far from signalling the end. In fact, with just one word the Reserve Bank has kept the door open to a cash rate below 2.5%.”

“The key word here is “reductions”. Forgive us for getting grammatical, but that little ‘s’ at the end makes all the difference. In market-speak, the Reserve Bank has given themselves optionality.” 

Market traders reacted to an extension of the easing cycle. Bond yields were bid lower, the kiwi dollar fell against trading partners, and the local stock market rallied.

But inflation risks haven’t disappeared. The Reserve Bank estimates core inflation was at 2.8% in the June quarter and headline inflation at 2.7%, with the latter expected to reach 3% in September. 

Slow economic growth may not automatically cool inflation. Committee members said it partly reflected supply constraints rather than weak demand, with potential output held back by minimal labour force growth and weak investment.

“This limits the rate of growth the economy can sustain without generating additional inflationary pressure. In an environment of constrained supply, inflation could stay elevated for longer as demand recovers,” they said.

ANZ chief economist Sharon Zollner said the Committee was keeping an open mind on further rate cuts, noting that Wednesday’s move effectively front-loaded what had already been signalled in August.

“Turning points are very messy, and this is not the time of the cycle to be hubristic about one’s ability to forecast precisely what’s needed or what will be delivered, particularly given the long lags with which monetary policy decisions work their way through the economy”. 

“If the data starts to pick up meaningfully, they won’t cut,” Zollner said.