The Reserve Bank of New Zealand (RBNZ) has reduced its benchmark interest rate for the first time since March 2020 and indicated that further cuts may be forthcoming in the months ahead.
This decision, reflecting a significant dovish shift due to inflation approaching its 1% to 3% target, triggered a sell-off in the kiwi dollar.
The central bank lowered rates by 25 basis points to 5.25%, a move that occurred nearly a year earlier than the bank's own forecasts, Reuters reports.
The move caught some market participants off guard and led to increased speculation about a potentially aggressive path of rate cuts extending through to the end of 2025.
Markets had anticipated nearly a 70% probability of a 25-basis-point rate cut due to a series of weaker economic data, yet the actual decision surprised many, as 19 out of 31 economists surveyed in a Reuters poll had expected the RBNZ to maintain its current rate, given that it had held steady since May 2023.
“The Committee agreed to ease the level of monetary policy restraint by reducing the OCR (official cash rate),” said the central bank statement.
Investors responded by driving the kiwi dollar down by 1% to $0.6015, wiping out nearly all of the 1% overnight gains.
Furthermore, swaps adjustments now suggest an additional 32 basis points of easing by October and a total of 71 basis points of easing by the end of the year.
Market expectations place rates around 3.0% by the end of 2025, significantly below the central bank’s projections.
ASB Bank's chief economist, Nick Tuffley, predicted that the RBNZ will likely continue to reduce the cash rate by 25 basis points at consecutive meetings.
“If inflation pressures evaporate faster than expected, the RBNZ may need to hasten the return to a more neutral setting of around 3.25%,” Tuffley said.
The central bank issued a cautious outlook, stressing that monetary policy will need to remain restrictive for an extended period. Despite this, it projected that the cash rate would be at 3.85% by the end of 2025.
“Although the Bank seemed to strike a cautious tone about further policy easing, we think it will cut rates more aggressively than many are anticipating,” stated Abhijit Surya, economist at Capital Economics.
Moreover, in a press conference following the policy announcement, RBNZ governor Adrian Orr stated that economic growth has slowed since May and concerns about pricing expectations have eased.
“It's a good news story of pricing behaviours changing rapidly,” Orr commented.
The central bank anticipates that New Zealand will experience a technical recession this year, defined as two consecutive quarters of economic contraction. This follows similar downturns in both 2022 and 2023.