New Zealand central bank cuts cash rate by 25 bps
[WELLINGTON] New Zealand cut its benchmark rate by 25 basis points to 3.25 per cent and flagged a slightly deeper easing cycle than it forecast three months ago, underlining the growing risks to economic growth from a sharp shift in US trade policies.
The decision was in line with a Reuters poll where all but one of the 30 economists surveyed forecast the Reserve Bank of New Zealand would cut the cash rate for the sixth successive meeting.
The central bank has slashed rates by 225 basis points since August, with lower inflation giving policymakers leeway to reduce borrowing costs as the economy faces fresh global risks from US President Donald Trump’s international trade war.
“Inflation is within the target band, and the Committee is well placed to respond to domestic and international developments to maintain price stability over the medium term,” the RBNZ said in a statement accompanying its policy review.
The central bank is now forecasting the cash rate will be at 2.92 per cent in the fourth quarter of 2025 and at 2.85 per cent in the first quarter of 2026, a slightly deeper easing cycle than had been projected on February.
However, the decision to cut the cash rate by 25 basis points was not unanimous with one of the five members of the committee voting to hold the cash rate at 3.5 per cent.
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“The case for lowering the OCR (official cash rate) to 3.25 per cent highlighted that CPI inflation is in the target range and there is significant spare capacity in the economy,” the minutes from the RBNZ’s meeting said.
The New Zealand dollar rose to US$0.5957 from US$0.5930, while two-year interest rates swaps increased 6 basis points to 3.1850 per cent as the market was caught off guard by news that the decision was not unanimous.
The central bank warned that the US tariff blitz could hurt growth globally and at home.
“The announced increase in US tariffs will lower global demand for New Zealand’s exports, particularly from Asia, constraining domestic growth. Heightened global policy uncertainty is expected to weigh on business investment and consumption in New Zealand,” the central bank said.
Fragile growth, US tariff woes
A global front-runner in withdrawing pandemic-era stimulus, the RBNZ lifted rates 525 basis points between October 2021 and September 2023 to curb inflation in the most aggressive tightening since the official cash rate was introduced in 1999.
The punishing borrowing costs, however, took a heavy toll on demand and tipped the economy into recession last year. While, the economy has emerged from the slump, growth remains weak and is being further hampered by a slowdown in the global economy and the government’s tight fiscal strategy.
Markets expect lower inflation will give the RBNZ sufficient leeway to cut the cash rate at least once more this year.
New Zealand’s annual inflation remains within the 1 to 3 per cent target band at 2.5 per cent but the central bank is forecasting it will increase to 2.7 per cent in the third quarter.
New Zealand is one of several countries to ease rates as inflation has moved lower, but its sharp reductions to borrowing costs contrast with a more cautious approach by the US Federal Reserve and its counterpart in Australia.
The Reserve Bank of Australia cut rates by 25 basis points last week but its cash rate remains higher than New Zealand’s at 3.85 per cent.
Trump’s tariff policies and his broader economic agenda have shaken up financial markets and raised fears of a recession, complicating policymaking for central banks and delaying investment decisions across a whole host of industries. REUTERS
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