By Lucy Craymer
WELLINGTON (Reuters) – New Zealand’s central bank cut its key interest rate for the first time since March 2020, sending the local dollar into a tailspin, while policymakers announced further rate cuts in the coming months and said inflation was moving closer to its 1-3 percent target.
The decision to cut the key interest rate by 25 basis points to 5.25 percent came almost a year earlier than the Reserve Bank of New Zealand (RBNZ) itself had forecast and surprised some market participants.
The easing of monetary policy was in line with market prices but exceeded the expectations of most economists. In a Reuters poll, 19 out of 31 economists predicted that the central bank would keep its monetary policy unchanged, as it has been doing since May 2023.
“The committee agreed to ease monetary policy restraint by lowering the official policy rate (OCR),” the central bank said in a statement.
“The pace of further easing will depend on the Committee’s confidence that price behaviour remains consistent with a low inflation environment and that inflation expectations are anchored around the 2 percent target,” it said.
Investors reacted by pushing the kiwi dollar down 0.75% to $0.6032, erasing most of the 1% gains made overnight as weak US producer price data pushed the US dollar lower. Swaps changed to imply a further 29 basis points of easing by October and 67 basis points by year-end. Interest rates are expected to remain at around 3.0% by the end of 2025, well below the RBNZ’s forecast. Bank bill futures also rose.
Nick Tuffley, chief economist at ASB Bank, said he expected the RBNZ to continue cutting the key interest rate by 25 basis points in consecutive meetings.
“If inflation pressures ease faster than expected, the RBNZ may need to accelerate the return to a more neutral level of around 3.25%,” Tuffley added. ASB Bank and Kiwibank announced they would cut their mortgage rates.
The RBNZ forecast called for at least three more rate cuts by the middle of next year. The base rate was expected to be 4.9% in the fourth quarter of 2024 and 4.4% in the second quarter of 2025. Previously, it had been assumed that the rate cuts would not begin until mid-2025.
The minutes of the meeting, published together with the statement, state that the committee has observed that the allocation of risks has increasingly shifted since the May monetary policy statement.
“A number of indicators suggest that the economy is contracting faster than expected. The downside risks to production and employment that became apparent in July have become more evident,” the minutes continue.
A global leader in unwinding pandemic-era stimulus measures, the RBNZ has raised interest rates by 525 basis points since October 2021 to contain inflation, the most aggressive tightening since the official policy rate was introduced in 1999.
New Zealand’s annual inflation rate has fallen in recent months and currently stands at 3.3 percent, but is expected to return to the central bank’s target range in the third quarter of this year.
The interest rate hikes have significantly slowed the economy. Growth in the first quarter was meager and the latest data suggest that momentum remains subdued.
New Zealand joins other central banks that are beginning to cut their interest rates. The European Central Bank, Canada, Sweden and Switzerland have already cut their rates, and more and more analysts are expecting a half-percentage point cut at the US Federal Reserve’s September meeting.
New Zealand’s neighbor Australia, however, is an exception to the global easing trend. The Reserve Bank of Australia ruled out short-term interest rate cuts last week.
(Reporting by Lucy Craymer; Editing by Himani Sarkar and Shri Navaratnam)
