(Bloomberg) -- New Zealand’s central bank is expected to lower interest rates by half a percentage point for a second straight meeting, becoming one of the most aggressive cutters among its western peers.
The Reserve Bank will reduce the Official Cash Rate by 50 basis points to 4.25% on Wednesday in Wellington, according to 22 of 23 economists surveyed by Bloomberg. One analyst expects a 75-point reduction.
The economy has stalled and inflation is slowing more rapidly than policymakers predicted, driving them to return the benchmark rate to a more neutral level that no longer constrains growth. Investors are betting the RBNZ will cut the cash rate to 3.25% by the second half of next year, but the pace of easing remains uncertain amid lingering concerns about global inflation following Donald Trump’s US election victory.
“This is a challenging time for the central bank,” said Stephen Toplis, head of research at Bank of New Zealand in Wellington. “There is no doubt further easing will be required to fertilize the new growth but there is very little clarity as to the requisite pace or extent of that easing.”
The RBNZ will publish its decision at 2 p.m. on Wednesday and Governor Adrian Orr will hold a press conference an hour later. It is a quarterly Monetary Policy Statement with fresh forecasts.
If it moves as economists expect, the RBNZ will have reduced its benchmark by 125 points in little more than three months, after it cut by 25 points in August and 50 points in October.
That would make it one of the most aggressive among its global counterparts. Policymakers in Canada and Sweden have also cut by 125 points but over a longer time-frame after starting their easing cycles earlier this year. The Federal Reserve and European Central Bank have moved their target rates down by 75 points so far this cycle.
In stark contrast, the Reserve Bank of Australia is yet to move.
Inflation slowed to 2.2% in the third quarter, returning to the RBNZ’s 1-3% target band for the first time in more than three years. Wage inflation has eased for six straight quarters.
The economy shrank in the second quarter and local economists expect a further contraction in the third, putting the nation in its second recession in less than two years. Consumer spending is subdued, manufacturing is in a slump and companies are shedding workers amid sluggish demand.
This week’s decision is the RBNZ’s last for 2024 and there is a 12-week gap until the next meeting in mid-February. That lengthy pause in part explains why there is still some risk of a 75-point move, said Sharon Zollner, chief New Zealand economist at ANZ Bank in Auckland.
“A 50-point cut is clearly the path of least resistance,” she said. “If there is going to be a surprise — given the RBNZ’s confidence regarding the inflation outlook and the unusually long gap until the next meeting — a larger cut does seem likelier than a smaller one.”
Economists expect the RBNZ will signal a less aggressive series of rate cuts in 2025 when it updates its projections tomorrow. Most forecast the cash rate will fall to 3.5% by the middle of next year, which would put it around a level considered neutral.
“The inflation beast has been slayed,” said Jarrod Kerr, chief economist at Kiwibank in Auckland. “We need the RBNZ to loosen its grip fast — before doing any more unnecessary damage to the economy.”
--With assistance from Shinjini Datta.
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