NZ delivers first rate cut in 4 years and signals more, kiwi falls Reuters

Written by Lucy Craymer

WELLINGTON (Reuters) – New Zealand's central bank cut interest rates for the first time since March 2020 and signaled further cuts in the coming months, saying inflation was close to its target of 1% to 3% in a sharp tilt that sparked the sell-off. per dollar.

The decision to cut rates by 25 basis points to 5.25% came almost a year ahead of the Reserve Bank of New Zealand's (RBNZ) forecast, which surprised some market players and prompted aggressive betting until the end of 2025. .

Markets priced in a near 70% chance of a quarterly rate cut following a string of soft economic data, but the cut defied the expectations of most economists, with 19 out of 31 economists in a Reuters poll predicting the RBNZ would be kept on hold. from May 2023.

“The Committee has agreed to ease the restrictiveness of monetary policy by reducing the OCR (official cash rate),” the central bank said in its statement, and indicated further reductions to come depending on how inflation develops.

Investors reacted by dropping the kiwi dollar 1% to $0.6015, erasing most of the 1% overnight gain as soft US producer price data weakened the US dollar. Volatility has changed to suggest another 32 points of easing in October and 71 points of easing by the end of the year. Rates are seen near 3.0% by the end of 2025, well below RBNZ projections. The future of the bank bill also jumped.

ASB chief economist Nick Tuffley said he expected the RBNZ to continue cutting interest rates by 25 basis points at successive meetings.

“If inflationary pressures evaporate faster than expected, the RBNZ may need to accelerate its return to a neutral rate of around 3.25%,” Tuffley added. ASB and Kiwibank, Westpac and ANZ have announced reductions in their mortgage rates.

The central bank issued a warning, stressing that policy will need to remain tight for some time, but still predicts the cash rate at 3.85% by the end of 2025.

“Although the Central Bank seems cautious about easing policy, we think it will cut rates more than many expected,” said Abhijit Surya, an economist at Capital Economics.

Market perceptions of further rate cuts reflected the central bank's bleak economic projections.

RBNZ Governor Adrian Orr told a post-policy press conference that growth had weakened since May and concerns about price expectations had faded.

“It's a great story of rapidly changing pricing behavior,” Orr said.

The central bank expects New Zealand to return to recession – two consecutive quarters of recession – this year after similar declines in 2023 and 2022.

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The RBNZ's forward guidance suggested at least three more cuts by the middle of next year, forecasting the cash rate at 4.9% in the fourth quarter of 2024 and 4.4% in the second quarter of 2025. Earlier, it did not expect to start reducing prices. until mid-2025.

New Zealand is joining the global push to reduce rates. The European Central Bank, the Bank of England, Canada, Sweden and Switzerland have all cut interest rates and a growing number of analysts are now penciling in a half-point rate cut at the Federal Reserve's meeting in September.

New Zealand's neighbor Australia, however, is different from the world rate reduction trend, as the Bank of Australia last week decided to cut rates in the near term.

The RBNZ's minutes of the meeting, released alongside its statement, said the Committee noted that the balance of risks had shifted gradually since the May Monetary Policy Statement.

“With a broad range of indicators suggesting that the economy is picking up faster than expected, the risks to the output and employment effects highlighted in July are becoming increasingly apparent,” the minutes added.

The world's frontrunner in unwinding pandemic-era stimulus, the RBNZ has raised base rates by 525 basis points from October 2021 to curb inflation in the biggest tightening since the official monetary policy was introduced in 1999.

New Zealand's annual inflation rate has eased in recent months and is currently running at 3.3% as it is expected to return to the central bank's target rate in the third quarter of this year.

Kiwibank's Chief Economist, Jarrod Kerr, said that the focus is now on the rate reduction required.

“They reduce neutrality,” Kerr said.

“We're going to see a 250 to 300 basis point reduction in this cycle and that's what's going to attract the attention of businesses and that's what's going to attract the attention of households.”