By Lucy Craymer
WELLINGTON (Reuters) – New Zealand’s central bank cut its benchmark rate by 50 basis points to 3.75% on Wednesday and flagged further reductions in borrowing costs amid moderating inflation as policymakers sought to revive a struggling economy.
The Reserve Bank of New Zealand Governor Adrian Orr said the board is forecasting a lower terminal rate than in its November projections, and expects two more 25-basis point rate cuts in April and May subject to economic conditions evolving as expected.
The rate track pushed it broadly in line with market pricing and reinforced the RBNZ’s dovish stance in contrast with a more cautious approach in Australia and the U.S., denting the New Zealand dollar and sparking a rally in 90-day bank bill futures.
“If economic conditions continue to evolve as projected, the Committee has scope to lower the OCR further through 2025,” the RBNZ said in its accompanying policy statement after the cut met market expectations in a Reuters poll.
Orr, speaking at a press conference, said: “We are looking at lowering the official cash rate a little bit quicker than what we projected back in November…We have our projection of the OCR being around 3% by year end.”
The RBNZ’s new projection has rates at 3.45% by June, and at 3.10% in the fourth-quarter, down from the November estimate of 3.2%, helped by inflation moving to the middle of the bank’s 1%-3% target.
The central bank has now cut rates by 175 basis points since August in a much needed boost for an economy emerging from a deep recession.
“The main message from today’s Monetary Policy Statement is the lowering (again) of the Official Cash Rate track. The RBNZ are signalling more cuts, sooner,” said Kiwibank chief economist Jarrod Kerr
The RBNZ said it is well placed to respond to future inflationary shocks but added that global uncertainty, particularly led by U.S. President Donald Trump’s tariff policies, pose risks to the economy.
“The RBNZ’s aggressive 50-basis point cut to 3.75% shows its determination to revive the economy, despite inflation risks and global uncertainties like Donald Trump’s re-election as U.S. President,” said Junvum Kim, senior sales trader at Saxo Asia Pacific.
Several of the large banks in New Zealand including Westpac, ASB Bank, Kiwibank and Bank of New Zealand cut mortgage rates following the cash rate announcement.
Bill futures rallied as markets priced in a 93% chance of an easing in April and have rates near 3.0% by year-end, which is seen as the bottom of the cycle.
The kiwi dollar slipped 0.3% to $0.5683 but rebounded to last fetch $0.5707.
GLOBAL TARIFF, ECONOMIC UNCERTAINTY
A global front-runner in withdrawing pandemic-era stimulus, the RBNZ lifted rates 525 basis points since October 2021 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 in the third quarter of last year – the worst downturn outside of the pandemic since 1991.
The weakened state of the economy has added urgency to policymakers efforts to stimulate demand. The government has already abandoned hopes for a return to budget surpluses, seeing deficits for the next five years.
New Zealand’s annual inflation has come off in recent months and is currently at 2.2%, but the central bank said a volatile period ahead will probably see it increase to 2.7% in the third quarter before moderating again.
New Zealand is one of several countries to ease policy as inflation has moved lower, but its sharp rate reductions contrast with a more cautious approach by the U.S. Federal Reserve and its counterpart in Australia, which on Tuesday delivered the first cut in rates in more than four years.
Trade and other broader economic policies under Trump’s second term in power have also raised policy uncertainty around the world due to the renewed risk of inflation.
“Lower interest rates will encourage spending, although elevated global economic uncertainty is expected to weigh on business investment decisions,” the RBNZ said.
“Geopolitics, including uncertainty about trade barriers, is likely to weaken global growth.”
(Reporting by Lucy Craymer; Editing by Shri Navaratnam)
