New Zealand’s inflation rate climbed to 2.5% y/y in the first quarter of 2025, up from 2.2% in Q4 2024 and above the market consensus of 2.3%. This was the highest inflation rate since June 2024. Inflation was largely driven by higher gasoline and rent prices. Quarterly, CPI rose to 0.9%, up from 0.5% in Q4 and above the market estimate of 0.7%.
RBNZ expected to cut rates
The Reserve Bank of New Zealand won’t be losing much sleep over the rise in inflation, which is still within the Reserve Bank’s target of 2%-3%. What is primarily worrying RBNZ officials are escalating trade tensions and a worsening outlook for the global economy, as US President Trump continues to threaten additional tariffs.
Even with the spike in inflation, money markets have fully priced in a rate hike at the May 28 meeting. The RBNZ trimmed rates by a quarter-point earlier this month, bringing the cash rate down to 3.5%, its lowest level since Oct. 2022. The central bank is expected to remain aggressive and continue cutting rates in order to protect the New Zealand economy in the difficult economic landscape. We could see a cash rate drop to 2.75% or even 2.5% by the fourth quarter.
The erratic tariff policy in the US is expected to have limited direct effect on New Zealand’s economy. The US-China trade war is, however, a huge concern, as China’s growth will decline and this will hurt New Zealand’s exports, as China is New Zealand’s largest trading partner.