New Zealand’s central bank implemented its third rate cut in four months on Wednesday, lowering the cash rate by 50 basis points to 4.25%, aligning with expectations from most economists in a Reuters poll. The Reserve Bank of New Zealand (RBNZ) also hinted at further substantial easing, including a likely 50-basis-point reduction in February, as inflation trends closer to the bank’s target.
RBNZ Governor Adrian Orr noted there was minimal debate about cutting by less than 50 basis points, despite some market speculation of a larger 75-basis-point reduction. He emphasized that even with the 50-basis-point cut, monetary policy remains somewhat restrictive. “There’s significant output gap and spare capacity, so 50 (bps) felt right,” Orr explained during a news conference. The bank’s projections also support an additional 50-basis-point cut at the February meeting.
Initially, the New Zealand dollar and short-term interest rates rose after the decision, reflecting market anticipation of a larger cut. However, these gains receded as attention shifted to the governor’s dovish remarks, signaling further easing next year.
Economists broadly expect at least a 25-basis-point cut in February but acknowledge significant developments could occur before the meeting. ASB Chief Economist Nick Tuffley highlighted the RBNZ’s openness to future rate adjustments, noting no effort was made to moderate market expectations for the pace of cuts.
The gap until the next RBNZ meeting allows time for key developments, including a full cycle of quarterly domestic data and global events like the U.S. presidential inauguration. Governor Orr stated that the central bank aims to reach a neutral rate—estimated at 2.5% to 3.5%—by the end of 2025.
Following the announcement, major retail banks in New Zealand reduced their interest rates. Kiwibank Chief Economist Jarrod Kerr suggested that while a 25-basis-point cut in February is likely, further reductions may be necessary to stimulate an economy struggling to exit recession. “We believe rates need to fall below the RBNZ’s 2025 forecast track to support recovery,” Kerr said.
The central bank predicts economic growth will rebound in 2025 as lower rates encourage investment and spending. However, employment growth is expected to remain weak until mid-2025, with financial stress easing gradually.
New Zealand joins other central banks worldwide in cutting rates as inflation cools. In contrast, neighboring Australia is expected to hold off on rate cuts until the first half of next year, diverging from the global trend.
