RBNZ lowers interest rate, tempers expectations for future cuts

The Reserve Bank of New Zealand lowered its official cash rate (OCR) by 50 basis points to 4.25% on Wednesday, marking its second consecutive half-point cut.

The move aligned with forecasts, with 22 of 23 economists surveyed by Bloomberg anticipating the decision.

RBNZ governor Adrian Orr indicated that another 50-point reduction could occur in February, contingent on the economy evolving as projected.

The RBNZ's aggressive rate cuts, totaling 125 basis points since August, placed it among the most proactive central banks globally.

Projections suggested a gradual easing trajectory, with the OCR expected to average 3.83% by mid-2025.

Despite the cut, policymakers considered only 25 or 50 basis-point options, avoiding more drastic measures amid ongoing economic weakness.

The decision came as New Zealand grapples with subdued economic conditions, including a recession in the third quarter.

However, the central bank anticipated a recovery in 2025, driven by lower borrowing costs.

Growth was forecast to rebound from 0.5% in the year to March 2025 to 2.3% in the year to March 2026.

Employment growth was expected to remain sluggish until mid-2025, with financial stress easing gradually.

Inflation, currently at 2.2%, was projected to briefly dip to the RBNZ's 2% target early next year before climbing again and remaining above target through 2027.

While domestic price-setting behaviour was stabilising, uncertainties persist regarding inflation’s trajectory.

The New Zealand dollar initially strengthened following the rate cut, rising nearly half a US cent, as markets interpreted a reduced likelihood of further aggressive easing.

However, it pared gains after Orr emphasised the conditionality of future cuts.

Short-term interest also responded, with two-year swaps - key to mortgage pricing - rising by 12 basis points, reflecting a tempered outlook for further cuts.

The RBNZ’s upward revision of its neutral rate estimate, indicating a shallower easing cycle, contributed to the reaction.

Reporting by Josh White for Sharecast.com.