The Reserve Bank of New Zealand (RBNZ) has indicated that a significant further reduction in interest rates is likely early next year if the economy performs as forecasted. This announcement follows the Monetary Policy Committee’s (MPC) decision to cut the Official Cash Rate (OCR) by 50 basis points to 4.25%, a move widely anticipated by economists.
In a press conference following the decision, RBNZ Governor Adrian Orr noted that the central bank’s forward projections align with another 50-basis-point reduction in February 2024, contingent on the economy evolving as expected. “Our forward projection is consistent with a 50-basis-point reduction in February,” Orr said. “But it’s also conditional on economic projections panning out.”
The RBNZ’s latest economic assessment paints a picture of a sluggish New Zealand economy, with output still below its potential. “Economic activity in New Zealand remains subdued,” the bank said in its official statement. “If economic conditions continue to evolve as projected, the Committee expects to be able to lower the OCR further early next year.”
Despite the central bank’s decision to ease monetary policy, challenges persist. The RBNZ reiterated its view that the economy likely contracted in the third quarter of 2024, marking New Zealand’s second recession in less than two years. However, the bank’s projections suggest that lower interest rates will help spur demand, leading to an economic rebound in 2025.
Following the announcement, the New Zealand dollar experienced significant volatility. Initially, the currency gained almost half a US cent after the rate cut, reflecting market optimism. However, the dollar pared its gains after Orr hinted at another 50-basis-point cut in February.
David Croy, a senior strategist at ANZ Bank New Zealand, noted the market’s response to Orr’s comments. “Strictly speaking, the maths shows that the track — which is a quarterly average — implies a 40 basis-point cut in February,” Croy said. “But when the governor hinted at another 50-pointer, markets obviously sat up and took note!”
The RBNZ has been among the most aggressive central banks in the West in reducing rates during this easing cycle. Over the past three months, the central bank has lowered rates by a cumulative 125 basis points. This aggressive approach is driven by an urgent need to revive a struggling economy while keeping inflation within target levels.
While other central banks, including those in Canada and Sweden, have also reduced their benchmark rates by 125 basis points, the RBNZ’s easing cycle began later. By comparison, the Federal Reserve and the European Central Bank have cut rates by 75 basis points so far, while the Reserve Bank of Australia has yet to begin its easing cycle.
Despite its aggressive easing stance, the RBNZ’s inflation outlook has raised eyebrows. Inflation is projected to accelerate from 2% in the first quarter of 2025 to 2.5% by the third quarter, remaining above the bank’s target midpoint of 2% through early 2027. This upward trend in inflation underscores the delicate balance the central bank must maintain between stimulating growth and preventing overheating.
The RBNZ’s updated forecasts indicate modest economic growth in the near term, with annual growth expected to recover to 2.3% by March 2026, up from a meager 0.5% in the year ending March 2025. However, employment growth is projected to remain weak until mid-2025, suggesting that financial stress for many households will persist despite lower borrowing costs.
“Economic growth is expected to recover during 2025, as lower interest rates encourage investment and other spending,” the RBNZ said. “Employment growth is expected to remain weak until mid-2025, and, for some, financial stress will take time to ease.”
The RBNZ highlighted uncertainties surrounding inflation dynamics, particularly the persistence of certain components of inflation. “While domestic price-setting behavior is now more in line with the Committee’s inflation objective, members discussed uncertainty about the persistence of some components of inflation,” the bank said in its statement.
Despite these risks, the bank appears committed to maintaining an accommodative monetary stance to support the economic recovery. This approach aligns with broader global trends, as central banks navigate the dual challenges of ensuring stable growth while managing inflationary pressures.
The RBNZ’s emphasis on a conditional 50-basis-point cut in February has set the stage for heightened market anticipation in early 2024. However, the bank’s projections and Orr’s comments suggest that future policy moves will be carefully calibrated based on economic data.
Orr clarified that the MPC did not consider a more extreme rate cut of 75 basis points or a more modest 25-basis-point cut during its November meeting. “A half-point cut felt right,” he said, signaling a commitment to balanced and measured policy decisions.
New Zealand’s monetary policy developments come against the backdrop of varying approaches by other major central banks. While Canada and Sweden have already moved aggressively to lower rates, New Zealand’s relatively later start has prompted it to take swift action in recent months. By contrast, the Federal Reserve and European Central Bank have been more cautious, reducing rates by 75 basis points each so far.
The Reserve Bank of Australia remains a notable outlier, having yet to begin its easing cycle. This divergence in policy highlights the unique economic challenges faced by each country, ranging from domestic inflation pressures to differing growth trajectories.
