The Reserve Bank of New Zealand (RBNZ) recently announced a second consecutive half-percentage point cut in interest rates, bringing the Official Cash Rate down to 4.25% from 4.75%. This move was largely anticipated by economists. However, the RBNZ also indicated a slower pace of easing in the future, with inflation expected to rise.
The RBNZ’s new projections suggest that the average OCR will decrease to 3.83% by the middle of the next year, signaling a shift towards more gradual rate cuts. Despite having already lowered rates by 125 basis points in just over three months, the central bank is optimistic about inflation accelerating to 2.5% by the third quarter of 2025, aligning with its target range of 1-3%.
Following the announcement, the New Zealand dollar rose, and yields on two-year notes also saw an increase. RBNZ Governor Adrian Orr is expected to provide further insights during a press conference. The central bank remains hopeful about economic recovery, forecasting annual growth to rebound to 2.3% by March 2026 from a low of 0.5% in March 2025.
The RBNZ believes that lower interest rates will stimulate investment and spending, leading to a gradual improvement in economic conditions. However, it acknowledges that employment growth may remain weak until mid-2025, and some individuals may continue to face financial stress for some time.
While inflation is projected to dip to 2% early next year, it is expected to rise again and stay above 2% through early 2027. The RBNZ has expressed some uncertainty about the persistence of certain inflation components, indicating a cautious approach towards future policy decisions.
Compared to other central banks like Canada and Sweden, the RBNZ has been more aggressive in its rate cuts. Despite initially considering rate hikes earlier this year, the RBNZ has shifted its stance towards easing, reflecting the evolving economic conditions. The market is now speculating on the possibility of further rate cuts, although the RBNZ’s latest projections suggest a more measured approach with smaller adjustments or pauses in the future.
Overall, the RBNZ’s decision to lower interest rates while signaling a more gradual easing path underscores its commitment to supporting economic growth and managing inflation effectively. As the global economic landscape continues to evolve, central banks like the RBNZ play a crucial role in navigating uncertainties and maintaining stability in financial markets.
