Easing cycles: Orr speaking at a news conference in Wellington. The central bank chief says a third large cut in interest rates could be delivered early next year if the economy evolves as expected, after easing policy by half a percentage point. — Bloomberg
WELLINGTON: 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 yesterday’s meeting.
The Reserve Bank of New Zealand’s (RBNZ) Monetary Policy Committee lowered the official cash rate (OCR) to 4.25% from 4.75% yestersday in Wellington, as anticipated by 22 of 23 economists in a Bloomberg survey.
The RBNZ’s new forecasts showed 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.”
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 showed 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% to 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.
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 showed.
“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.”
The RBNZ’s updated forecasts showed inflation slowing from 2.2% currently to 2% early next year, but then picking up again and remaining above 2% through to early 2027.
“While domestic price setting behaviour is now more in line with the committee’s inflation objective, members discussed uncertainty about the persistence of some components of inflation,” the RBNZ said.
Policymakers in Canada and Sweden also lowered their benchmark rates by 125 points, although those nations started their easing cycles earlier than New Zealand.
The US Federal Reserve and European Central Bank have moved their target rates down by 75 points so far this cycle, while the Reserve Bank of Australia is yet to move. — Bloomberg
