Lucy Kramer
WELLINGTON (Reuters) – The Bank of New Zealand slashed its benchmark cash rate for the first time since March 2020, sending the dollar tumbling as policymakers signaled further rate cuts in the coming months and said inflation was approaching 1% to the 3% target.
The decision to cut interest rates by 25 basis points to 5.25%, nearly a year ahead of the Reserve Bank of New Zealand’s own forecasts, surprised some market participants and prompted bets that aggressive easing would continue until the end of 2025 .
Markets had priced in nearly 70% of a 25 basis point rate cut following a run of weak economic data, but the cut exceeded most economists’ expectations, including 31 economists polled by Reuters. 19 people predict the New Zealand Federal Reserve will remain stable since May 2023.
“The Committee agreed to ease monetary policy constraints by lowering the OCR (Official Cash Rate) and signaled that further monetary policy cuts will be made depending on the evolution of inflation,” the central bank said in a statement.
Investors reacted with the New Zealand dollar falling 1% to $0.6015, erasing most of a 1% gain overnight as weak U.S. producer price data weighed on the greenback. The swaps would imply a further easing of 29 basis points by October and a further 67 basis points by the end of the year. By the end of 2025, interest rates are expected to be close to 3.0%, well below the New Zealand Federal Reserve Bank’s forecast. Bank bill futures also rose sharply.
Nick Tuffley, chief economist at ASB Bank, said he expected the Bank of New Zealand to continue to cut the cash rate by a steady 25 basis points in successive meetings.
“If inflationary pressures dissipate faster than expected, the Bank of New Zealand may need to accelerate the return to a neutral level of around 3.25%,” Tuffley added. ASB Bank, Kiwibank and ANZ Bank have announced mortgage rate cuts.
The central bank did issue a warning, stressing that policy needs to remain restrictive for some time to come, but still forecast the cash rate at 3.85% by the end of 2025.
Capital Economics economist Abhijit Surya said, “While the central bank appears cautious about easing policy further, we think it will cut rates more deeply than many expect. radical.
Market views on further rate cuts reflect the central bank’s own pessimistic economic forecasts.
New Zealand Federal Reserve Bank President Adrian Orr said at a post-policy press conference that economic growth has slowed since May and concerns about pricing expectations have dissipated.
The central bank expects New Zealand to slip into a technical recession this year – two consecutive quarters of economic contraction.
Loose policy path
The New Zealand Federal Reserve’s forward guidance recommends at least three more interest rate cuts by the middle of next year, with the cash rate expected to be 4.9% in the fourth quarter of 2024 and 4.4% in the second quarter of 2025. .
New Zealand joins other central banks in starting to ease interest rates. The European Central Bank, Canada, Sweden and Switzerland have all cut interest rates, and more and more analysts expect the Federal Reserve to cut interest rates by 0.5 percentage points at its September meeting.
However, New Zealand’s neighbor Australia is an exception to the global easing trend, with the Reserve Bank of Australia last week ruling out any near-term interest rate cuts.
Minutes of the New Zealand Federal Reserve meeting released with the statement said the committee observed that the balance of risks had gradually changed since the May monetary policy statement.
The minutes added: “A range of indicators point to a faster-than-expected economic contraction, with downside risks to output and employment highlighted in July becoming more apparent.”
As a global leader in withdrawing pandemic-era stimulus, the Federal Reserve Bank of New Zealand has raised interest rates by 525 basis points since October 2021 to curb inflation, the most aggressive tightening since the introduction of the official cash rate in 1999.
New Zealand’s annual inflation rate has fallen back in recent months and now stands at 3.3%, and is expected to return to the central bank’s target range in the third quarter of this year.
The interest rate hike has caused a sharp economic slowdown, with economic growth weak in the first quarter, and recent data show that economic growth momentum remains weak.
The Federal Reserve Bank of New Zealand said a range of indicators pointed to a “faster-than-expected economic contraction,” underscoring why policymakers must move quickly to ease monetary conditions.
