New Zealand’s central bank has indicated that a third substantial interest rate cut may be implemented early next year if economic conditions evolve as expected, following a 50 basis point reduction announced today. The Reserve Bank of New Zealand (RBNZ) lowered its Official Cash Rate (OCR) to 4.25% from 4.75% in Wellington, a move anticipated by 22 out of 23 economists surveyed by Bloomberg. This marks the second consecutive 50-point cut, reflecting the RBNZ’s efforts to stimulate the economy now that inflation pressures have eased.
Governor Adrian Orr stated that the RBNZ’s updated projections suggest another 50 basis point cut could occur at its next meeting on February 19, contingent on continued positive economic data. “It’s conditional on how the economy performs,” Orr noted during a press conference.
In total, the RBNZ has reduced rates by 125 basis points in just over three months, positioning it among the most aggressive central banks in its approach to rate cuts within the Western world. The central bank’s updated forecast projects the cash rate to fall to 3.83% by mid-2025, hinting at a shift toward more gradual cuts after the initial series of reductions.
“The speed and extent of easing will depend heavily on incoming data,” said Sharon Zollner, chief New Zealand economist at ANZ Bank. “The odds of another 50 basis-point reduction in February have increased following the governor’s comments, but the data from now until then will be the determining factor. There are already signs of a broad-based uptick in economic activity.”
Following the rate decision, the New Zealand dollar strengthened briefly, climbing nearly half a cent against the U.S. dollar as traders adjusted their expectations of further aggressive rate cuts. However, it later pared some of these gains after Orr’s remarks, trading at 58.70 U.S. cents as of 4:45 p.m. in Wellington, up from 58.31 cents earlier in the day.
The RBNZ reiterated its expectation that New Zealand’s economy contracted in the third quarter of 2024, pushing the country into a technical recession for the second time in under two years. However, it expects a recovery to follow as lower borrowing costs stimulate demand.
The central bank forecasts annual growth to rebound to 2.3% in the year through March 2026, after a subdued 0.5% growth projection for the year ending March 2025. “Economic growth is anticipated to recover in 2025 as lower interest rates encourage investment and other forms of spending,” the bank stated. However, it also noted that employment growth will likely remain sluggish until mid-2025, with many households continuing to experience financial stress.
On inflation, the RBNZ projects a decrease to 2% by early 2025, but with a gradual rise thereafter, remaining above the 2% target through early 2027. The bank’s inflation target is a 2% midpoint within a 1-3% range, and policymakers have acknowledged uncertainty around the persistence of some inflationary components.
In comparison, central banks in Canada and Sweden have also cut their benchmark rates by 125 basis points, though these countries began their easing cycles earlier than New Zealand. The U.S. Federal Reserve and the European Central Bank have reduced rates by 75 basis points each, while the Reserve Bank of Australia has yet to take similar action.
Doug Steel, senior economist at Bank of New Zealand, emphasized that the RBNZ is likely to continue cutting rates to support the economic recovery, though the pace and extent of those cuts remain uncertain. “The direction for policy is clear—removing restraint. But how quickly and how far it will go remains to be seen,” Steel said.
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