The Reserve Bank of New Zealand has reduced its key policy rate for the first time in four years, cutting it by 25 basis points to 5.25%. This is the first rate cut since March 2020 and signals the possibility of further monetary easing soon.
The move, which came ahead of the bank's own forecasts, surprised many in the market and led to a more than 1% decline in the New Zealand dollar. This reaction was influenced by the central bank's observation that inflation is nearing its target range of 1-3%.
While markets had anticipated a roughly 70% chance of a quarter-point rate cut due to recent weak economic data, most economists did not expect this adjustment. Out of 31 surveyed economists, 19 had predicted the rate would stay unchanged from May 2023.
The central bank announced that it has decided to ease monetary policy by lowering the official interest rate, with indications that additional cuts may follow based on upcoming inflation data.
This announcement led to a 1% decline in the New Zealand dollar, dropping it to $0.6015, as it reversed a recent gain prompted by weak US producer price data.
In response, market swaps are now anticipating a further 32 basis point cut by October and a total of 71 basis points by the end of the year, projecting the rate to hit 3.0% by the end of 2025. Bank bill futures also saw an increase.
The Institute for Supply Management’s Index of Activity in the Services Sector has returned to growth, with new orders and employment showing improvement. A competing index from S&P Global was near its highest point in two years in July.
Interest rates are high as inflation rose sharply in 2021 and 2022, and has been slowing down more gradually than it increased. The year started with an unexpected rise in inflation, putting pressure on the Fed to cut rates.
The Governor of the Reserve Bank of New Zealand, Adrian Orr, mentioned in a news conference that economic growth had slowed since May and concerns about inflation expectations had eased. He indicated that this was a positive sign, suggesting that price trends are likely to change.
The central bank anticipates that New Zealand will experience a technical recession this year, marked by two consecutive quarters of economic contraction, similar to the downturns in 2022 and 2023.
The Reserve Bank of New Zealand is projecting at least three additional rate cuts by mid-2025, with the cash rate expected to be 4.9% by the fourth quarter of 2024 and 4.4% by the second quarter of 2025. Previously, the bank did not foresee rate reductions until mid-2025.
New Zealand is following a global trend of monetary easing, alongside moves by the European Central Bank, the Bank of England, Canada, Sweden, and Switzerland.
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