(Bloomberg) -- New Zealand’s central bank chief said a third large cut in interest rates could be delivered early next year if the economy evolves as expected, after easing policy by half a percentage point at today’s meeting.
The Reserve Bank’s Monetary Policy Committee lowered the Official Cash Rate to 4.25% from 4.75% Wednesday in Wellington, as anticipated by 22 of 23 economists in a Bloomberg survey. It was the second straight cut of 50 basis points as the RBNZ seeks to revive the economy now that inflation is under control.
The bank’s updated projections are consistent with another 50-point reduction at its next decision on Feb. 19, Governor Adrian Orr told reporters at a press conference. “But it’s also conditional on economic projections panning out,” he said.
The RBNZ has now lowered rates by 125 basis points in little more than three months, making it one of the most aggressive cutters among its western peers. Its new forecasts show the average cash rate falling to 3.83% by the middle of next year, suggesting it may eventually move to more gradual cuts.
“The speed and extent of easing will be highly data dependent,” said Sharon Zollner, chief New Zealand economist at ANZ Bank in Auckland. “The odds of a 50 basis-point cut in February have lifted, given the governor’s comments, but the data between now and then will carry the day, and there are clear signs of a broad-based lift in activity.”
The New Zealand dollar jumped after the rate decision, rising almost half a US cent as traders saw less chance of further aggressive easing, but trimmed gains after Orr’s comments. It bought 58.70 US cents at 4:45 p.m. in Wellington, up from 58.31 cents beforehand.
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Economic Recovery
The RBNZ reiterated its expectation that the economy contracted in the third quarter of 2024, putting the nation back into recession for the second time in less than two years. It sees a pick-up ahead as lower borrowing costs revive demand.
Annual growth will recover to 2.3% in the year through March 2026 from just 0.5% in the year ending March 2025, the RBNZ’s forecasts show.
“Economic growth is expected to recover during 2025, as lower interest rates encourage investment and other spending,” the bank said. “Employment growth is expected to remain weak until mid-2025 and, for some, financial stress will take time to ease.”
The RBNZ’s forecasts show inflation slowing from 2.2% currently to 2% early next year, but then picking up again and remaining above 2% through to early 2027. It aims for the 2% midpoint of its 1-3% target range.
“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 RBNZ said.
Policymakers in Canada and Sweden have also lowered their benchmark rates by 125 points, although both those nations started their easing cycles earlier than New Zealand. The Federal Reserve and European Central Bank have moved their target rates down by 75 points so far this cycle, while the Reserve Bank of Australia is yet to move.
There is no doubt the RBNZ will continue to cut rates to fertilize a nascent economic recovery, said Doug Steel, senior economist at Bank of New Zealand in Wellington.
“The direction of travel for policy remains clear enough – removing restraint,” he said. “But how fast and how far remains to be seen.”
--With assistance from Matthew Burgess.
(Adds economist comments)
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