(Bloomberg) — New Zealand’s central bank cut interest rates, starting an easing cycle much earlier than originally announced as the economy weakens and inflation eases, sending the local dollar tumbling.
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The Reserve Bank’s monetary policy committee cut the key interest rate by a quarter of a percentage point to 5.25 percent on Wednesday in Wellington. Nine of 23 economists in a Bloomberg survey expected the move, while 14 expected no change. The RBNZ’s new forecasts assume that the key interest rate will fall further in the fourth quarter and by about 100 basis points by the middle of next year.
“We are confident that inflation is back on target and we can begin to normalize interest rates,” Governor Adrian Orr said at a news conference. “It was about building the committee’s confidence to get started, and that’s where we are now.”
The RBNZ’s move to loosen monetary policy is a rapid reversal after it said in May that it was considering raising interest rates and would not cut them until the second half of 2025. The bank’s concerns about sluggish domestic inflation are easing as the economy teeters on the brink of its third recession in less than two years and unemployment rises.
The New Zealand dollar fell after the decision and was at 60.05 US cents at 4:55 p.m. in Wellington, having previously been at 60.70 cents. Bond yields also fell. Stock prices recovered and the leading index S&P/NZX 50 closed 2.1 percent higher.
Investors had estimated a 67% probability that the RBNZ would cut interest rates today.
Orr said the bank had considered a 50-point cut before settling on a 25-point cut as a relatively low-risk start to the easing cycle. Future cuts would depend on the data and the RBNZ was “in a strong position to proceed calmly,” he said.
Another recession
The RBNZ’s updated forecast for the OCR “represents a 25 basis point cut at each of the next three meetings and a slower pace thereafter to 3%,” said Sharon Zollner, chief New Zealand economist at ANZ Bank in Auckland.
The RBNZ struck a less aggressive tone in its July report, saying tighter policies may curb demand more than expected. Today it forecast a contraction in the second and third quarters of this year, which would be the country’s third recession since late 2022.
“The Committee noted that the slowdown in domestic economic activity identified in the July monetary policy review has become more pronounced and broader,” the RBNZ said. “With a broad range of indicators pointing to the economy contracting faster than expected, the downside risks to output and employment highlighted in July have become more evident.”
What Bloomberg Economics says…
“A faster-than-expected economic downturn has shifted the balance of risks. Further easing will be necessary to halt the decline in demand and prevent the unemployment rate from rising too sharply. We expect further rate cuts of 250 basis points by the first quarter of 2026.”
— James McIntyre, economist
Click here to read the full note
Investors have increased their bets on central bank interest rate cuts since U.S. jobs data pointed to a recession in the world’s largest economy. The Federal Reserve is expected to begin its easing cycle next month, and central banks in Canada, England and the European Central Bank have already begun their measures.
In contrast, the Reserve Bank of Australia last week kept borrowing costs stable and Governor Michele Bullock indicated she would not hesitate to raise interest rates if necessary to get inflation under control.
The RBNZ’s updated forecasts show a significant decline in the future policy rate compared to the May forecasts. They show that the average policy rate will be 3.85% by the end of 2025, compared to 5.14% previously.
When asked to explain the major shift in the RBNZ’s monetary policy stance over three months, Orr attributed it to a number of recent indicators showing a slowdown in both the economy and inflation. This had led to “a material change in the Committee’s confidence in the effectiveness of monetary policy,” he said.
Inflation cooled to 3.3 percent in the second quarter, bringing the RBNZ’s target of 1-3 percent within reach, but the indicator of domestically induced inflation was 5.4 percent.
The central bank today forecast that inflation will fall to 2.3 percent in the current quarter, but does not expect it to return to the average of 2 percent until mid-2026.
“Recent indicators provide grounds for confidence that inflation will return to target in a sustained manner within a reasonable time frame,” the RBNZ said. “However, members noted that monetary policy will need to remain restrictive for some time to ensure that domestic inflationary pressures continue to abate.”
– With assistance from Matthew Burgess.
(Updated with the Governor’s comments from the third paragraph)
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