RBNZ surprises with larger rate cut, sparking currency drop
Growth has been tepid since a deep recession in 2024 despite the the central bank’s aggressive easing cycle
[WELLINGTON] New Zealand’s central bank cut interest rates more aggressively than most economists expected and said it is open to further reductions as it becomes more concerned about the struggling economy.
The Reserve Bank of New Zealand’s (RBNZ) Monetary Policy Committee reduced the official cash rate by 50 basis points to 2.5 per cent from 3 per cent on Wednesday (Oct 8) in Wellington, a move expected by 10 of 25 economists in a Bloomberg survey. Fifteen predicted a 25-point reduction.
The New Zealand dollar dropped 1 per cent against the greenback after the statement, to US$0.54 at 4 pm in Wellington from US$0.57 cents immediately before the release. The yield on policy sensitive two-year bonds fell eight basis points to 2.65 per cent, while the S&P/NZX 50 stock index rose.
“Economic activity through the middle of 2025 was weak,” the RBNZ said in a statement. The Committee opted for a big rate cut to mitigate the risk that economic weakness persists and “remains open to further reductions in the OCR as required,” it said.
New Zealand’s economy shrank more than expected in the second quarter and business sentiment remains downbeat, casting doubt on the strength of a second-half revival. The slack in the economy means price pressures are expected to abate and return inflation to the middle of the RBNZ’s 1-to-3 per cent target band in 2026.
“The downsides from the 50 basis-point cut are small, given the RBNZ’s August forecasts showed a strong likelihood the OCR would get there by year-end anyway,” said Nick Tuffley, chief economist at ASB Bank in Auckland.
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One further 25-point cut in November should be enough to underwrite the economic recovery, “but if it doesn’t, the RBNZ could potentially cut even further”, he said.
Kelly Eckhold, chief New Zealand economist at Westpac Banking in Auckland, said: “Further easing seems likely in November – and perhaps beyond given the reference to future ‘reductions’ in the OCR.
“The RBNZ emphasised signs of significant excess capacity in the economy that give them comfort that medium-term inflation will be well under control.”
SEE ALSO
Investors are now pricing another 25-point cut at the final meeting of the year in November with the risk of further easing early next year, swaps data show.
Outpacing peers
The Kiwi is the worst-performing Group-of-10 currency against the US dollar in the past 12 months as the RBNZ’s 300 basis points of rate cuts damps its appeal versus currencies with higher rates.
The Kiwi has slumped more than 6 per cent against the greenback in that time, and touched a fresh three-year low against the Aussie on Wednesday. The Reserve Bank of Australia has only lowered its benchmark by 75 points.
Today’s RBNZ decision was an interim rate review, meaning the bank did not issue new forecasts or hold a press conference.
Economic growth has been tepid since a deep recession in 2024 despite the RBNZ’s aggressive easing cycle. Unemployment has risen to a five-year high of 5.2 per cent and the housing market is languishing.
In a dovish pivot in August, the RBNZ projected the OCR would drop to 2.5 per cent by the end of the year, saying the economy had stalled and stimulus was needed.
But data later showed gross domestic product shrank 0.9 per cent in the second quarter, three times the decline the RBNZ had projected, fanning bets on a deeper easing being required.
While the policy committee discussed a 25-point cut today, the decision to take a larger step was reached by consensus, the RBNZ said.
Firms downbeat
A confidence survey yesterday showed fewer businesses expect the economy to improve in the next six months, while they were also downbeat about trading conditions and hiring intentions. That suggests little or no growth in the third quarter and raises the risk of a recession, the New Zealand Institute of Economic Research said.
Some indicators “suggest that economic activity recovered modestly in the September quarter, but there remains significant spare capacity in the New Zealand economy,” the RBNZ said.
Inflation accelerated to 2.7 per cent in the second quarter, and the central bank said today it will likely quicken to 3 per cent before slowing next year. Third-quarter inflation data is due Oct 20.
“There are upside and downside risks to the inflation outlook in New Zealand,” the RBNZ said. “Cautious behaviour by households and businesses could slow the economic recovery, reducing medium-term inflation pressure. Alternatively, higher near-term inflation could prove to be more persistent.”
Sharon Zollner, chief New Zealand economist at ANZ in Auckland, expects a 25-point cut in November to mark the end of the easing cycle.
“We see risks on both sides of that,” she said. “If the data continues to disappoint, another 50-point cut is possible. But it’s entirely possible that activity data will start to surprise to the upside from here.” BLOOMBERG
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