Top job: Breman speaks during an announcement in parliament in Wellington. Following the government announcement last month, Swedish policymaker Breman will take up her role as the governor of the RBNZ on Dec 1. — Reuters
WELLINGTON: New Zealand’s central bank has slashed its benchmark rate by an aggressive 50 basis points (bps), surprising some in the markets as policymakers signal concerns about the frail state of the economy and keep the door open for further easing.
The New Zealand dollar and interest rate swaps tumbled in the wake of the move that took the official cash rate (OCR) to 2.5%, as investors bet on more stimulus in the coming months to shore up demand and buffer the economy from rising global headwinds.
“The committee reached consensus to reduce the official cash rate by 50 bps to 2.5%,” the Reserve Bank of New Zealand (RBNZ) said in its accompanying policy statement.
“The committee remains open to further reductions in the OCR as required for inflation to settle sustainably near the 2% target mid-point in the medium term.”
The dovish stance will be a welcome relief for the New Zealand government and the country’s Prime Minister, Christopher Luxon, whose popularity has taken a sharp hit in recent months as the economic recovery he and his party campaigned on has failed to eventuate.
Luxon said publicly he would like to see the cash rate lower to try and shake off the economic torpor, with business confidence worsening and households in a depressed mood as they fret about the rising cost of living and scarcity of jobs.
The Taxpayers’ Union-Curia Poll released earlier yesterday found that the current government would not have enough seats to govern if an election was held today.
Finance Minister Nicola Willis said the rate cut is good news for growth, jobs and investment. She added: “We know many New Zealanders are still doing it tough.”
The RBNZ decision went against 15 of 26 economists surveyed in a Reuters poll who had forecast the RBNZ would cut the cash rate by 25 bps.
However, the larger cut wasn’t totally unexpected as the remaining 11 economists had picked a 50-bps reduction and markets were primed for the RBNZ to pull harder on its monetary policy levers to inject impetus to a weakened economy.
The New Zealand dollar tumbled 0.90% to US$0.5745, while two-year interest rate swaps fell to 2.5251% from 2.6194% before the decision. The market is now fully pricing in a further 25-bps cut to 2.25%, and is ascribing a 60% chance of a 2% terminal cash rate.
“The RBNZ’s decision signals that the likelihood of inflation pressures being weaker than previously anticipated carried more weight than waiting to see how quickly the economy rebounds and what ripple effects come from the current spike in inflation,” ASB chief economist Nick Tuffley said in a note.
The central bank has cut rates by 300 bps since August 2024, and with inflation within its target band of 1% to 3%, policymakers have leeway to lower borrowing costs further.
Yesterday’s policy meeting is Christian Hawkesby’s second-to-last meeting as RBNZ governor, after the government last month appointed Swedish policymaker Anna Breman to the role starting Dec 1.
A global front-runner in withdrawing pandemic-era stimulus, the RBNZ lifted rates by 525 bps between October 2021 and September 2023 to curb inflation in the most aggressive tightening since the OCR was introduced in 1999.
The punishing borrowing costs, however, slammed the brakes on demand and tipped the economy into recession last year.
Since then, it has struggled to motor on, contracting by 0.9% in the second quarter in a shock result that fuelled bets of steeper rate cuts.
While trading partner growth has been resilient, it is expected to slow in part due to US president Donald Trump’s sweeping tariffs and the government’s tight fiscal policy, hurting business confidence and pushing up unemployment.
One challenge for the bank is that inflation ticked up to 2.7% in the second quarter and the central bank expects inflation to reach 3% in the third quarter.
However, in its statement yesterday, the RBNZ said spare capacity in the economy should see inflation return to near its mid-point in 2026.
New Zealand is one of several countries to ease rates as inflation has moved lower, but its sharp reductions to borrowing costs contrast with a more cautious approach by the US Federal Reserve (Fed) and its counterpart in Australia.
The Reserve Bank of Australia held the cash rate steady last week as it flagged inflation concerns.
And last month, the Fed delivered its first rate cut for the year.
Zoe Wallis, investment strategist at brokerage Forsyth, is retaining her terminal rate forecast at 2.25% for now.
However, she said “there is a chance that further easing beyond that level could be on the cards if inflation proves well contained and the economy fails to fire up convincingly in coming months”. — Reuters
