The Reserve Bank of New Zealand (RBNZ) cut its cash rate for the third time in four months on Wednesday, trimming it by 50 basis points to 4.25%. The decision, which aligned with the expectations of most analysts, signaled the bank’s readiness for further rate cuts in the coming months, albeit at a more measured pace than some market participants had anticipated.
The decision to lower the cash rate by half a percentage point came as no surprise to 27 of the 30 economists surveyed in a Reuters poll. The RBNZ framed the move as part of its mandate to balance inflation control with the need to avoid undue volatility in employment, output, interest rates, and exchange rates.
“The committee agreed that a 50 basis point cut is consistent with their mandate of maintaining low and stable inflation, while seeking to avoid unnecessary instability in output, employment, interest rates, and the exchange rate,” the RBNZ noted in the minutes from its latest meeting.
This cautious approach reflects broader global trends. Central banks worldwide are easing monetary policies in response to cooling inflation and slowing economic activity. Yet, as highlighted by the RBNZ’s statement, this path is not without challenges, as central banks must carefully calibrate their interventions to maintain economic balance.
Despite meeting analyst expectations, the rate cut underwhelmed parts of the market that had been pricing in a nearly 40% chance of a more aggressive 75 basis point cut. The restrained approach prompted a noticeable shift in financial markets:
- New Zealand Dollar: The Kiwi dollar rose from US$0.5829 to US$0.5873 shortly after the announcement.
- Swap Rates: The two-year swap rate climbed to 3.6550% from 3.5900%.
These movements reflect both surprise among optimists betting on a more aggressive cut and a cautious acknowledgment of the RBNZ’s dovish outlook.
Nick Tuffley, chief economist at ASB, observed that the central bank’s statement left significant room for future rate reductions. “The RBNZ has left the doors wide open for its future moves, with no attempts to temper market expectations for the pace of future cuts,” he said.
The RBNZ’s updated forecasts suggest a steeper path for rate cuts than previously anticipated. The bank now expects the cash rate to fall to 3.8% by the second quarter of 2025 and to 3.6% by the end of that year. These projections mark a significant shift from August’s expectations and indicate a sustained easing cycle over the next two years.
Timing will also play a critical role. With three months until the RBNZ’s next scheduled meeting, there will be ample opportunity to assess incoming data, including quarterly domestic statistics and external developments, such as the inauguration of U.S. President-elect Donald Trump in January.
Following the RBNZ’s announcement, three major retail banks in New Zealand—BNZ, ASB Bank, and Kiwibank—moved swiftly to lower their interest rates. This immediate response underscores the central bank’s influence on borrowing costs across the economy and highlights the potential for increased consumer and business activity in response to cheaper credit.
For households and businesses, the cut offers some relief amid a challenging economic climate. However, financial stress remains a pressing issue for many, with the RBNZ noting that it will take time for lower rates to fully ease pressures on the most affected groups.
The RBNZ’s decision is rooted in a nuanced understanding of New Zealand’s economic.
- Inflation: Consumer price inflation slowed to 2.2% in the third quarter, moving closer to the RBNZ’s midpoint target of 2%. The central bank noted that domestic price and wage-setting behavior is becoming more aligned with this target.
- Growth: Economic growth is projected to recover in 2025 as lower interest rates encourage greater investment and spending. However, the recovery is expected to be gradual.
- Employment: Employment growth is forecast to remain weak until mid-2025, reflecting the lagging impact of monetary policy and broader economic adjustments.
- New Zealand’s monetary easing aligns with trends seen in other major economies, where central banks are cutting rates to address cooling inflation and sluggish growth. However, there are notable exceptions:
- Australia: Across the Tasman Sea, the Reserve Bank of Australia (RBA) has maintained its cash rate, with cuts not anticipated until the first half of next year.
- United States and Europe: In contrast, central banks in these regions are signaling a pause or slowdown in their rate adjustments, reflecting differences in economic conditions and inflationary pressures.
While the RBNZ’s actions offer a roadmap for supporting the economy, they are not without risks. A prolonged easing cycle could have unintended consequences, including the potential for asset bubbles or financial instability.
Additionally, external factors—ranging from geopolitical developments to shifts in global trade—could complicate the central bank’s efforts to chart a stable course.
Tuffley highlighted the importance of monitoring evolving circumstances. “The further pace of cuts will be dictated by events,” he said, emphasizing the need for flexibility in the face of changing economic and political dynamics.
