Market Analysis

First rate reduction in more than 4 years by NZ Central Bank signals further ease ahead

Amos Simanungkalit · 14 Aug 202411.8K Views

On Wednesday, New Zealand's central bank reduced its benchmark cash rate to 5.25%, marking its first policy easing since March 2020. This move reflects a shift as inflation approaches its target range of 1% to 3%.

The 25 basis point cut aligned with market expectations but surprised many economists. A Reuters poll showed 19 out of 31 economists had anticipated the Reserve Bank of New Zealand (RBNZ) would maintain its rate, as it has done since May 2023.

In its statement, the central bank noted, “The Committee agreed to ease the level of monetary policy restraint by reducing the OCR.” The statement further emphasized that the pace of future rate cuts would depend on ensuring that pricing behaviors remain aligned with a low inflation environment and that inflation expectations stay anchored around the 2% target.

The RBNZ's forward guidance indicates the possibility of at least three more rate cuts by mid-2025, with projections suggesting a cash rate of 4.9% by the fourth quarter of 2024 and 4.4% by the second quarter of 2025. Initially, the bank had not expected to start reducing rates until mid-2025.

The central bank noted that the balance of risks had shifted since the May Monetary Policy Statement. The minutes from the meeting highlighted that the economy appears to be contracting faster than expected, with downside risks to output and employment becoming more apparent.

As one of the first global central banks to withdraw pandemic-era stimulus, the RBNZ has raised rates by 525 basis points since October 2021, marking the most aggressive tightening since the official cash rate was introduced in 1999.

Recent data show that annual inflation in New Zealand has decreased to 3.3%, with expectations that it will fall within the central bank’s target range by the third quarter of this year. However, the rate hikes have significantly slowed economic growth, with minimal first-quarter growth and ongoing subdued economic momentum.