NEW Zealand’s central bank cut interest rates by half a percentage point, stepping up the pace of easing as policymakers become more concerned about the economic slowdown.
The Reserve Bank of New Zealand’s (RBNZ) Monetary Policy Committee lowered the Official Cash Rate (OCR) to 4.75 per cent from 5.25 per cent on Wednesday (Oct 9) in Wellington, as anticipated by 19 of 23 economists in a Bloomberg survey. The remainder expected a quarter-point move. It is the RBNZ’s second straight reduction after it began its easing cycle with a quarter-point cut in August.
“The Committee agreed that the economic environment provided scope to further ease the level of monetary policy restrictiveness,” the RBNZ said. Future changes to the OCR will depend on the bank’s “evolving assessment of the economy”, it said.
New Zealand’s economy has stalled, unemployment is rising and house prices are falling as the prolonged period of high borrowing costs curbs demand. Economists say inflation is now slowing rapidly, and some have warned it may undershoot the 2 per cent midpoint of the RBNZ’s 1 to 3 per cent target range.
The RBNZ gave few clues as to what the next step is and another 50-point reduction is “not a done deal,” said Nick Tuffley, chief economist at ASB Bank in Auckland.
“However, we see the risk being that data will come in on the softer side of RBNZ expectations,” he said. “We continue to expect another 50 basis-point cut in November.”
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The New Zealand dollar fell more than a quarter of a US cent after the decision to 61.05 US cents at 2.35 pm in Wellington. Stocks extended gains to be up 1.5 per cent while bond yields declined, with 10-year government securities falling as much as five basis points to 4.26 per cent.
Today’s decision was a policy review, which is not accompanied by fresh economic forecasts or a press conference.
Changing stance
The shift to bigger cuts represents another abrupt change of stance for the RBNZ.
It said in May it would not start easing policy until the second half of 2025, and after its Aug 14 pivot governor Adrian Orr said the bank intended to move “calmly” and at a “measured pace”.
The RBNZ’s latest forecasts in August showed the annual inflation rate falling to 2.3 per cent in the third quarter from 3.3 per cent in the second. That data is due Oct 16.
“The Committee agreed that monthly price indices signal a continued decline in consumer price inflation,” the RBNZ said in its record of meeting. “Business price-setting behaviour is now more consistent with the Committee’s inflation remit.”
Just 7 per cent of firms expect to hike prices in the final three months of the year, the New Zealand Institute of Economic Research said last week in its quarterly survey.
Gross domestic product declined 0.2 per cent in the three months to June, putting the economy on the brink of its second recession in less than two years. Slowing demand is tipped to boost the jobless rate when third-quarter data is published in early November.
“Economic growth is weak, in part because of low productivity growth, but mostly due to weak consumer spending and business investment,” the RBNZ said. “High-frequency indicators point to continued subdued growth in the near term.”
Many central banks have begun cutting rates and the US Federal Reserve kicked off its easing cycle last month with a half-point reduction. The Reserve Bank of Australia is a notable exception, holding its key rate steady at 4.35 per cent due to upside inflation risks.
“The Committee discussed the respective benefits of a 25 basis-point versus a 50 basis-point cut,” the RBNZ said. “They agreed that a 50 basis-point cut at this time is most consistent with the mandate of maintaining low and stable inflation.”
Current short-term market pricing was consistent with this decision, it added.
A majority of economists polled before today’s decision expected the RBNZ will follow up with a half-point cut at its final meeting of the year on Nov 27.
“The outlook is broadly consistent with the August Monetary Policy Statement,” the RBNZ said. “Members agreed that an OCR of 4.75 per cent is still restrictive and leaves monetary policy well placed to deal with any near-term surprises.” BLOOMBERG