NZ cuts rates for first time in over 4 years; flags more easing, kiwi tumbles

By Lucy Craymer

WELLINGTON (Reuters) -New Zealand’s central bank cut the benchmark cash rate to 5.25% on Wednesday, its first policy easing since March 2020 and flagged more cuts ahead as inflation was converging on its target of 1% to 3%.

The decision to reduce rates by 25 basis points was in line with market pricing but defied most economists’ expectations, with 19 of 31 economists in a Reuters poll having forecast the Reserve Bank of New Zealand (RBNZ) to hold steady as they have since May 2023.

“The Committee agreed to ease the level of monetary policy restraint by reducing the OCR,” the central bank said in its statement.

“The pace of further easing will depend on the Committee’s confidence that pricing behaviour remain consistent with a low inflation environment, and that inflation expectations are anchored around the 2 percent target,” it added.

The RBNZ’s forward guidance suggests 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% is the second quarter of 2025. Previously, it had not expected to start cutting rates until the middle of 2025.

“The Committee observed that the balance of risks has progressively shifted since the May Monetary Policy Statement,” the minutes of the meeting, released alongside its statement, said.

“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.

A global front-runner in withdrawing pandemic-era stimulus, the RBNZ has lifted rates 525 basis points since 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 come off in recent months and is currently running at 3.3% with expectations that it will return to the central bank’s target band in the third quarter of this year.

The rate hikes have sharply slowed the economy with meagre first quarter growth and recent data indicating still-subdued momentum.