RBNZ Monetary Policy Committee says further rate cuts may be needed as Donald Trump’s trade war poses downside risk to NZ economy

The Reserve Bank (RBNZ) cut the Official Cash Rate (OCR) to 3.50% from 3.75% on Wednesday amid ongoing financial markets fallout from Donald Trump’s trade war.

The RBNZ's Monetary Policy Committee (MPC) opted to cut the benchmark interest rate by 25 basis points, as widely expected, noting Trump’s tariff policies posed a negative risk to the New Zealand economy.  

“The recently announced increases in global trade barriers weaken the outlook for global economic activity. On balance, these developments create downside risks to the outlook for economic activity and inflation in New Zealand,” they wrote. 

“As the extent and effect of tariff policies become clearer, the Committee has scope to lower the OCR further as appropriate”. 

The United States was set to impose a raft of tariffs on the entire world at 4pm this afternoon, midnight in Washington DC. These include a 10% baseline on all foreign imports and much higher rates on those specific countries. 

Asian countries face particularly high tariffs. Imports from China will be charged a blanket tariff of 104% on all its products, plus additional rates on some specific items.

RBNZ said these tariff increases could put upward pressure on global prices due to higher import costs, while protectionism and uncertainty will lower the productive capacity of the global economy. Less efficient supply chains will also add to costs.

However, these costs could be offset by decreased demand for New Zealand’s exports in Asia and lower levels of investment and spending, due to uncertainty and falling asset prices.

The price of imports may fall as some global products targeted by tariffs are redirected to the NZ market, and lower oil prices will also support domestic consumption and production.

“Most members of the Committee consider that recent global policy developments have shifted the balance of risk for New Zealand inflation lower over the medium term. Others note that, while uncertainty around the inflation outlook has increased, the risks remain balanced at this stage,” the RBNZ said. 

Westpac NZ’s chief economist, Kelly Eckhold, initially published a note arguing the central bank should pause its rate cuts, but reversed that position after tariffs were announced. 

“Markets have moved to price in risk of a much lower OCR over 2025 as the bomb that the US administration detonated on global trade reverberates. The news of rounds of retaliation between China and the US imply very elevated global growth risks, and that bodes poorly for the New Zealand outlook,” he wrote. 

Finance Minister Nicola Willis said the Treasury had estimated the tariffs would cut the economic growth of NZ’s trading partners from 2.5% to roughly 2% next year. This weakness will flow through to the local economy, due to less export demand and business confidence. 

The Treasury also predicted global inflation would rise from 2.5% to 3% in the coming year, as a result of the increased costs in the global supply chain.

Most economists think the net effect of tariffs will be a weaker NZ economy and lower inflation, although others argue it will be an ‘adverse supply shock’ that will push prices higher and should be counterbalanced with higher interest rates. 

NZIER’s latest Quarterly Survey of Business Opinion—taken prior to the tariff news—showed business confidence improving but actual demand for goods and services still weak. 

While firms were feeling optimistic about economic recovery that sentiment hadn’t translated into any hiring or new investments, Kiwibank economists said. 

The survey showed businesses were facing cost pressures, partly related to the low Kiwi dollar, but were finding it very difficult to pass those higher costs on to consumers.

Doug Steel, an economist at BNZ, said the data’s past relationship with headline inflation would suggest below target, or even zero, inflation — although nobody was forecasting that.

In a note prior to the decision, BNZ rates strategist Jason Wong said the RBNZ’s policy choice would only be of "vague interest” against the volatile global backdrop.

“The Bank would be wise to keep its options open regarding the speed and extent of any future policy easing,” he wrote.

April Monetary Policy Review statement in full:

The Monetary Policy Committee today agreed to reduce the Official Cash Rate by 25 basis points to 3.5 percent.

Annual consumer price inflation remains near the mid-point of the Monetary Policy Committee’s 1 to 3 percent target band. Firms’ inflation expectations and core inflation are consistent with inflation remaining at target over the medium term.

Economic activity in New Zealand has evolved largely as expected since the February Monetary Policy Statement. Higher-than-expected export prices and a lower exchange rate have supported primary sector incomes and overall economic growth. While monetary restraint has been removed at pace, household spending and residential investment have remained weak.

The recently announced increases in global trade barriers weaken the outlook for global economic activity. On balance, these developments create downside risks to the outlook for economic activity and inflation in New Zealand.

Having consumer price inflation close to the middle of its target band puts the Committee in the best position to respond to developments. As the extent and effect of tariff policies become clearer, the Committee has scope to lower the OCR further as appropriate. Future policy decisions will be determined by the outlook for inflationary pressure over the medium term.

Summary Record of MPC Meeting – April 2025

Annual consumer price inflation remains near the mid-point of the Monetary Policy Committee’s 1 to 3 percent target band. Firms’ inflation expectations and core inflation are consistent with inflation remaining at target over the medium term. The recently announced increases in global trade barriers have weakened the outlook for global economic activity and, on balance, create downside risks to the outlook for inflation in New Zealand over the medium term.

Domestic economic activity has evolved largely as projected in February

The Committee discussed developments in domestic economic activity. Higher-than-expected export prices and a lower exchange rate have supported primary sector incomes and overall economic growth. However, household spending and residential investment have been weaker than expected.

The Committee noted that substantial spare productive capacity remains in the economy. This reflects the preceding period of restrictive interest rates, subdued global economic activity, and lower government consumption as a share of the economy. Overall, expectations of future inflation and the degree of spare productive capacity in the economy are consistent with annual CPI inflation remaining close to the target midpoint over the medium term.

Recent declines in interest rates and higher export earnings are expected to support economic growth. The pace of growth is expected to be modest, as potential GDP growth is constrained by ongoing weakness in productivity growth and low net immigration. The Committee noted that the full economic impact of cuts in the OCR since August 2024 are yet to be fully realised.

Recent increases in tariffs and uncertainty about global trade policy have weakened the outlook for global economic activity

Against this backdrop, the recently announced increases in tariffs in the United States, retaliation from several trading partners, and heighted geoeconomic uncertainty will have a significant negative impact on global growth. This will have adverse effects for domestic economic activity.

The implications of increased tariffs for global and domestic inflation are more ambiguous

The Committee noted that the impact of increased tariffs on global inflation is unclear at this point, particularly given the recency of the announcement and the possibility of further changes in global trade policy settings. The implications for inflation will vary by country.

Several factors stemming from tariff increases could put upward pressure on global prices over the medium term. Prices will rise in tariff-imposing countries, reflecting the higher cost of imports. Increased trade protectionism and uncertainty will also lower the productive capacity of the global economy. The costs of trade could also rise as global supply chains adapt to increased trade restrictions and geoeconomic fragmentation.

The Committee noted that there were several factors that could offset these cost and supply-side elements. For New Zealand, demand for our exports is likely to decrease, reflecting weaker activity in our trading partner economies, especially in Asia. Increased uncertainty around global trade policy will also weigh on investment and spending, as will declines in asset prices.

Trade diversion effects could also lower the prices of New Zealand’s imports, as some global exports targeted by tariffs are redirected to our market. Lower global oil prices will also lower New Zealand import prices.

The global policy response will be an important consideration in gauging the implications of increased tariffs for medium-term inflation in New Zealand. For example, an easing in fiscal and monetary policy in our trading partners could mitigate some of the expected downturn in global economic activity. The Committee noted fiscal policy had been eased in China and Europe recently. Structural reforms, trade, and industrial policy responses may also offset some of the impacts of increased trade barriers.

The recent decline in the New Zealand dollar will help to cushion the immediate effect of decreased global demand for New Zealand exports. Lower oil prices will also support domestic consumption and production.

The Committee was briefed on the financial market reaction to the tariff announcements. While price movements in currency, equity and fixed-income markets have been large there are currently no significant signs of dysfunction in financial markets.

The monetary policy response to tariffs will focus on the medium-term implications for inflation

Most members of the Committee consider that recent global policy developments have shifted the balance of risk for New Zealand inflation lower over the medium term. Others note that, while uncertainty around the inflation outlook has increased, the risks remain balanced at this stage.

The Committee noted that the increase in tariffs will take time to work through the global economy. The direct price increases for economies imposing tariffs and the dampening impact of increased economic uncertainty on global demand will occur relatively quickly. The adaptation of global supply chains to increased trade barriers will take longer to work through. It was noted that monetary policy cannot offset the long-term negative supply-side effects of higher barriers to international trade.

The Committee agreed to lower the OCR

The Committee noted that the preceding cuts to the OCR have yet to have their full effect on the economy.

With CPI inflation close to the mid-point of the target range, significant spare capacity in the economy, and a weaker activity outlook stemming from global trade policy, the Committee agreed that a further reduction in the OCR was appropriate. 

The Committee agreed that a 25 basis point reduction in the OCR would be consistent with their mandate of maintaining low and stable inflation. As the extent and effect of tariff policies become clearer, the Committee has scope to lower the OCR further as appropriate. Future policy decisions will be determined by the outlook for inflationary pressure over the medium term. 

Attendees

Members of MPC: Christian Hawkesby (Chair), Bob Buckle, Carl Hansen, Karen Silk, Paul Conway, Prasanna Gai
Treasury Observer: James Beard
MPC Secretary: Adam Richardson