Cash rate

IBISWorld forecasts the cash rate to inch downwards by 0.01 percentage points in 2024-25 to average 5.47% over the year. The cash rate is expected to start declining over the year, depending upon the stabilisation of inflationary pressures and the sustained overall health of the New Zealand economy. In its May 2024 monetary policy statement, the Reserve Bank of New Zealand (RBNZ) monetary policy committee acknowledged that inflation is on track to return to the target range of 1-3% later in 2024. Yet, the committee stated that interest rates must remain elevated for an extended period to ease inflationary pressures.

Following the outbreak of COVID-19, the RBNZ reduced the OCR to 0.25% at an emergency meeting in March 2020. This OCR remained unchanged for much of the pandemic as the RBNZ sought to support economic activity amid significant global disruptions to travel, trade, business, and consumer spending. In response to the economic challenges, the RBNZ launched the Funding for Lending Programme in December 2020 to facilitate further lending and support trends towards full employment and stable inflation. Despite sporadic COVID-19 outbreaks and travel limitations, the relative success of the country in containing the virus helped the domestic economy and employment recover sooner than expected. By the September 2020 quarter, economic activity had surpassed pre-pandemic levels, driven by rising household consumption, infrastructure development, and increasing business investment. Reflecting these positive developments, the RBNZ ended the Funding for Lending Programme in July 2021, which was initially set to conclude in December 2022.

As economic conditions continued to improve, the RBNZ raised the OCR for the first time since the emergency cut in October 2021. Several subsequent increases followed as the RBNZ tightened its monetary policy to prevent the economy from overheating. Factors like surging energy prices, global supply chain disruptions, and tight labour market conditions contributed to exceptionally high inflation, with annual rates reaching 7.2% in both September and December 2022, slightly below the record high of 7.3% in June 2022. These inflation rates significantly exceeded the RBNZ's 1-3% target range. For this reason, the RBNZ raised the OCR several times over the three years through 2023-24, with the OCR reaching 5.5% in May 2023 and remaining unchanged since then. Overall, IBISWorld forecasts the cash rate to rise at an average annual rate of 0.37 percentage points over the five years through 2024-25.

Outlook

IBISWorld forecasts the cash rate to fall by 1.05 percentage points in 2025-26, to average 4.42%. The RBNZ is expected to reduce OCR further over the coming year as inflation is set to return to its target band of 1-3%. A softening labour market, marked by an expected rise in unemployment, is likely to help control inflation by tempering wage growth. Moreover, following the spike driven by the Russia-Ukraine conflict, a continued downward correction in fuel prices is anticipated to reduce retail petrol prices and transport costs. This reduction will further alleviate supply chain pressures, lowering overall prices and easing inflationary pressures.

Economic conditions are on track to continue to stabilise over the next five years, with inflation poised to ease. These conditions will create an environment where the RBNZ can implement a more expansionary monetary policy setting. In turn, the OCR will contract following its peak in 2023-24. Nonetheless, the rate of decline will depend on the RBNZ's ability to tame inflation. Overall, IBISWorld forecasts the cash rate to decline at an average annual rate of 0.07 percentage points over the five years through 2029-30, to 3.78%.