(Bloomberg) — New Zealand’s central bank chief suggested a further large cut in interest rates would be delivered early next year if the economy evolves as expected, after easing policy by a half-percentage point at today’s meeting.
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The Reserve Bank’s Monetary Policy Committee lowered the Official Cash Rate to 4.25% from 4.75% Wednesday in Wellington, as anticipated by 22 of 23 economists in a Bloomberg survey. The RBNZ’s new forecasts show the average OCR falling to 3.83% by the middle of next year, suggesting it may eventually move to more gradual rate cuts.
“Our forward projection is consistent with a 50-basis-point” reduction in February, Governor Adrian Orr told reporters at a press conference after the decision. “But it’s also conditional on economic projections panning out.”
The RBNZ said in its statement that “economic activity in New Zealand remains subdued and output continues to be below its potential.”
“If economic conditions continue to evolve as projected, the Committee expects to be able to lower the OCR further early next year.”
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The RBNZ has now lowered rates by 125 basis points in little more than three months, making it one of the most aggressive cutters among its western peers. But its new forecasts show inflation accelerating from 2% in the first quarter of 2025 to 2.5% by the third quarter. The central bank aims for the 2% midpoint of its 1-3% target range.
The New Zealand dollar pared an earlier gain after the governor’s comments on the rate outlook. The currency had jumped after the decision, rising almost half a US cent.
Economic Recovery
The RBNZ reiterated its expectation that the economy contracted in the third quarter of 2024, putting the nation back into recession for the second time in less than two years. It sees a pick-up ahead as lower borrowing costs revive demand.
Annual growth will recover to 2.3% in the year through March 2026 from just 0.5% in the year ending March 2025, the RBNZ’s new forecasts show.
“Economic growth is expected to recover during 2025, as lower interest rates encourage investment and other spending,” it said. “Employment growth is expected to remain weak until mid-2025 and, for some, financial stress will take time to ease.”