By Lucy Craymer
WELLINGTON (Reuters) -New Zealand’s central bank slashed rates by 50 basis points on Wednesday and said policy is still restrictive even though inflation has returned to target, prompting markets to bet on yet more aggressive easing and sending the dollar skidding.
The decision to reduce the cash rate to 4.75% was in line with market pricing and most economists’ expectations, with 17 of 28 economists in a Reuters poll having forecast the Reserve Bank of New Zealand (RBNZ) to cut the benchmark rate by half a percentage point.
“The Committee agreed that it is appropriate to cut the OCR (official cash rate) by 50 basis points to achieve and maintain low and stable inflation, while seeking to avoid unnecessary instability in output, employment, interest rates, and the exchange rate,” the central bank said in its policy statement.
The kiwi dollar fell 0.6% to $0.6103, the lowest since late August, while two-year swap rates declined 4 basis points to 3.630% after the decision. Swaps imply there is further 42 basis points of easing to come at the RBNZ’s November meeting.
“Overall, the October meeting reinforces the bank’s dovish stance and indicates no clear signs of slowing in November. With inflation within target and the labour market fragile, the RBNZ will ease rates more swiftly,” said Shannon Nicoll, associate economist at Moody’s Analytics.
Minutes from the RBNZ committee said it assessed that annual inflation has returned to within its 1% to 3% target range in the third quarter, and is converging on the 2% midpoint.
New Zealand’s annual inflation has come off in the past few months, and the most recent data showed it was at 3.3% in the second quarter.
“Members agreed that an OCR of 4.75% is still restrictive and leaves monetary policy well-placed to deal with any near-term surprises,” the minutes added.
This is the second consecutive meeting in which the central bank has cut the official cash rate after starting its easing cycle in August with a 25-basis-point reduction.
“The New Zealand economy is now in a position of excess capacity, encouraging price- and wage-setting to adjust to a low-inflation economy. Lower import prices have assisted the disinflation,” the RBNZ statement said.
ANZ chief economist Sharon Zollner said that while the next move remains conditional on data, “there was nothing in today’s commentary to dissuade the market from continuing to price a follow-up 50bp cut in November as the likeliest outcome.”
WEAKENED ECONOMY
The central bank said the economy, which contracted in the second quarter, was expected to remain subdued over the near term with weak house price growth and lower levels of net immigration crimping overall demand.
“Economic growth is weak, in part because of low productivity growth, but mostly due to weak consumer spending and business investment,” the minutes stated.
The committee also warned about spillover effects from the escalating Middle East conflict, saying it could pose significant risks to both global economic activity and energy prices. Furthermore, it noted that economic growth in the United States and China is expected to slow.
Confidence improved slightly after the central bank’s rate cut in August when it also forecast the cash rate to move down to 3.85% by end-2025, underlining broad market consensus for more stimulus to shore up the economy.
New Zealand’s rate cuts align with similar moves by many central banks globally as policymakers rollback their aggressive inflation-busting tightening campaigns. The Federal Reserve slashed rates by an outsized 50 basis points at its last meeting in September.
New Zealand’s neighbour Australia remains an outlier to the easing trend as policymakers there say restrictive conditions must remain in place for a while longer to bring inflation to heel.
ASB Bank said the RBNZ’s decision underlined that rates were still well above neutral settings.
“Cutting by 50bp more than once would make the RBNZ a bit of a central bank maverick,” ASB chief economist Nick Tuffley said.
“But it is a reflection that the OCR, even at 4.75%, is still some way above neutral settings that we place in a 3-4% range.”
