By Lucy Craymer
WELLINGTON (Reuters) – New Zealand’s central bank cut its benchmark rate for the first time since March 2020 and announced further cuts in coming months, saying inflation was moving closer to its 1% to 3% target in a marked dovish tilt that prompted a sell-off in the dollar.
The decision to cut rates by 25 basis points to 5.25% came almost a year ahead of the Reserve Bank of New Zealand’s (RBNZ) own projections, taking some market players by surprise and prompting bets on an aggressive easing path through to the end of 2025.
Markets had priced in a near 70% chance of a quarter-point cut following a raft of weaker economic data, but the cut defied most economists’ expectations, with 19 of 31 economists polled by Reuters forecasting the RBNZ would hold steady as it has since May 2023.
“The Committee agreed to ease the level of monetary policy tightening by reducing the OCR (official cash rate),” the central bank said in its statement, noting that further cuts will follow depending on how inflation develops.
Investors reacted by sending the New Zealand dollar down 1% to $0.6015, erasing most of the 1% gains made overnight as weak US producer price data hit the greenback. Swaps changed to imply another 32 basis points of easing by October and 71 basis points of easing by year-end. Rates are forecast to be close to 3.0% by the end of 2025, well below the RBNZ projection. Bank bill futures also rose.
ASB Bank chief economist Nick Tuffley said he expects the RBNZ to continue to steadily cut the cash rate by 25 basis points in consecutive meetings.
“If inflationary pressures evaporate faster than expected, the RBNZ may need to accelerate the return to a more neutral level of around 3.25%,” Tuffley added. ASB Bank, along with Kiwibank, Westpac and ANZ Bank, have all announced cuts to their home lending rates.
The central bank issued a note of caution, stressing that policy will need to remain tight for a longer period, but still forecast the cash rate to stand at 3.85% by the end of 2025.
“While the Bank appeared to strike a cautious tone on further policy easing, we think it will cut rates more aggressively than many anticipate,” said Abhijit Surya, an economist at Capital Economics.
Market views on further rate cuts reflected the central bank’s own gloomy economic projections.
RBNZ Governor Adrian Orr told a post-policy news conference that growth has weakened since May and concerns about price expectations have eased.
“It’s good news that pricing behaviors are changing rapidly,” Orr said.
The central bank expects New Zealand to slip back into a technical recession (two consecutive quarters of economic contractions) this year after suffering a similar slump in both 2023 and 2022.
New Zealand joins global monetary easing
The RBNZ’s forecasts suggested at least three more cuts by the middle of next year, projecting the cash rate at 4.9% in the fourth quarter of 2024 and 4.4% in the second quarter of 2025. It had previously not expected to start cutting rates until mid-2025.
New Zealand is joining a global push to ease interest rates. The European Central Bank, the Bank of England, Canada, Sweden and Switzerland have all cut rates, and a growing number of analysts are expecting a half-percentage point cut by the Federal Reserve’s September meeting.
However, New Zealand’s neighbour Australia is an exception to the global trend of easing: last week the Reserve Bank of Australia ruled out rate cuts anytime soon.
The minutes of the RBNZ meeting, published alongside its statement, said the Committee noted that the balance of risks has shifted progressively since the Monetary Policy Statement in May.
“With a broad range of indicators suggesting the economy is contracting faster than anticipated, the downside risks to output and employment that were highlighted in July have become more apparent,” the minutes added.
The RBNZ, a global pioneer in unwinding pandemic-era stimulus, raised rates by 525 basis points from October 2021 to curb inflation in the most aggressive tightening since the official cash rate was introduced in 1999.
New Zealand’s annual inflation has eased in recent months and now stands at 3.3%, with expectations that it will return to the central bank’s target band in the third quarter of this year.
Kiwibank chief economist Jarrod Kerr said the focus now turned to the scale of rate cuts needed.
“They’re moving back to neutrality,” Kerr said.
“We’re going to see rate cuts of between 250 and 300 basis points in this cycle and that’s what’s going to get the attention of businesses and households.”
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