WELLINGTON, Oct 8 (Reuters) – The Reserve Bank of New Zealand (RBNZ) reduced its official cash rate by 50 basis points on Wednesday, marking a significant monetary easing move as economic weakness persists. The cut brings the benchmark rate down to 2.5%, the lowest level in over three years, reflecting policymakers’ growing concern about sluggish growth and subdued domestic demand. n nMarkets reacted swiftly, with the New Zealand dollar dropping to a six-month low at $0.5745, a decline of 0.90%. Two-year interest rate swaps also fell, sliding from 2.6194% to 2.5251%. Investors now fully anticipate an additional 25-basis-point reduction, potentially bringing the rate to 2.25%, and assign a 60% probability to a terminal rate of 2.00%. n nIn its policy statement, the central bank emphasized that further reductions remain on the table if needed to ensure inflation stabilizes around the 2% midpoint within the medium term. Inflation currently sits within the RBNZ’s 1% to 3% target range, giving officials room to prioritize growth over price control. n nThis latest action follows a cumulative 300-basis-point rate reduction since August 2024, reversing much of the aggressive tightening cycle that saw rates rise by 525 basis points between October 2021 and September 2023. At the time, the RBNZ was among the first globally to withdraw pandemic-era stimulus to combat rising prices. n nFinance Minister Nicola Willis welcomed the decision, calling it positive for economic expansion, employment, and investment. She acknowledged ongoing hardship for many households, citing cost-of-living pressures and weak consumer sentiment. Prime Minister Christopher Luxon, whose government has seen declining public support, has previously urged monetary easing to counter economic stagnation. Recent polling suggests the ruling coalition would fall short of a governing majority if an election were held today. n nGlobal trade dynamics are also weighing on the outlook. Although key trading partners have shown resilience, growth is expected to soften due to U.S. trade policies, including broad tariff measures under former President Donald Trump, alongside tight fiscal settings. These factors have dampened business confidence and contributed to higher unemployment. n nDespite third-quarter inflation projected to reach 3.0%, the RBNZ expects spare capacity in the economy to gradually pull price pressures back toward the target midpoint by 2026. n nThe decision contrasts with more cautious stances from other major central banks. The Reserve Bank of Australia held rates steady last week amid lingering inflation concerns, while the U.S. Federal Reserve implemented its first rate cut of the year only recently. n nASB chief economist Nick Tuffley noted that the RBNZ’s move reflects a judgment that weaker-than-expected inflation trends outweigh the risks of waiting for clearer signs of recovery. Forsyth Barr investment strategist Zoe Wallis maintains her forecast of a 2.25% terminal rate but acknowledges the possibility of deeper cuts if inflation remains under control and economic momentum fails to strengthen. n nChristian Hawkesby, the outgoing RBNZ governor, chaired this meeting as his penultimate policy session before Swedish economist Anna Breman takes over in December. n
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New Zealand delivers jolt to frail economy with 50-bp rate cut, flags more easing
WELLINGTON, Oct 8 (Reuters) – New Zealand ‘s central bank slashed its benchmark rate by an aggressive 50 basis points on Wednesday, surprising some in the markets as policymakers signalled concerns about the frail state of the economy and kept the door open for further easing. n nThe New Zealand dollar and interest rate swaps tumbled in the wake of the move that took the official cash rate to over a three-year low of 2.5%, as investors bet on more stimulus in the coming months to shore up demand and buffer the economy from rising global headwinds. n nSign up here. n n“The Committee reached consensus to reduce the official cash rate by 50 basis points to 2.5 percent,” the Reserve Bank of New Zealand said in its accompanying policy statement. “The Committee remains open to further reductions in the OCR as required for inflation to settle sustainably near the 2% target mid-point in the medium term.” n nThe dovish stance will be a welcome relief for the New Zealand government and the country’s prime minister, Christopher Luxon, whose popularity has taken a sharp hit in recent months as the economic recovery he and his party campaigned on has failed to eventuate. n nLuxon has said publicly he would like to see the cash rate lower to try and shake off the economic torpor, with business confidence worsening and households in a depressed mood as they fret about the rising cost of living and scarcity of jobs. The Taxpayers ‘ Union-Curia Poll released earlier Wednesday found that the current government would not have enough seats to govern if an election was held today. n nFinance Minister Nicola Willis said the rate cut is good news for growth, jobs and investment, adding: “We know many New Zealanders are still doing it tough.” n nHowever, the larger cut wasn ‘t totally unexpected as the remaining 11 economists had picked a 50-bp reduction and markets were primed for the RBNZ to pull harder on its monetary policy levers to inject impetus to a weakened economy. n nThe New Zealand dollar tumbled to six-month lows, losing 0.90% to $0.5745, while two-year interest rate swaps fell to 2.5251% from 2.6194% before the decision. The market is now fully pricing in a further 25-basis-point cut to 2.25%, and is ascribing a 60% chance of a 2.00% terminal cash rate. n n“The RBNZ’s decision signals that the likelihood of inflation pressures being weaker than previously anticipated carried more weight than waiting to see how quickly the economy rebounds and what ripple effects come from the current spike in inflation,” ASB chief economist Nick Tuffley said in a note. n nThe central bank has cut rates by 300 basis points since August 2024, and with inflation within its target band of 1% to 3%, policymakers have leeway to lower borrowing costs further. n nTRUMP POLICIES ADD TO ECONOMIC WOES n nWednesday ‘s policy review is Christian Hawkesby’s second-to-last meeting as RBNZ Governor, after the government last month appointed Swedish policymaker Anna Breman to the role starting December 1. n nA global front-runner in withdrawing pandemic-era stimulus, the RBNZ lifted rates 525 basis points between October 2021 and September 2023 to curb inflation in the most aggressive tightening since the cash rate was introduced in 1999. n nWhile trading partner growth has been resilient, it is expected to slow in part due to U.S. President Donald Trump ‘s sweeping tariffs and the government’s tight fiscal policy, hurting business confidence and pushing up unemployment. n nOne challenge for the central bank is that inflation is expected to reach 3.0% in the third quarter. n nHowever, in its statement on Wednesday, the RBNZ said spare capacity in the economy should see inflation return to near its mid-point in 2026. n nNew Zealand is one of several countries to ease rates as inflation has moved lower, but its sharp reductions to borrowing costs contrast with a more cautious approach by the U.S. Federal Reserve and its counterpart in Australia. n nThe Reserve Bank of Australia held the cash rate steady last week as it flagged inflation concerns. And last month, the Federal Reserve delivered its first rate cut for the year. n nZoe Wallis, investment strategist at brokerage Forsyth Barr, is retaining her terminal rate forecast at 2.25% for now. n nHowever, she said “there is a chance that further easing beyond that level could be on the cards if inflation proves well contained and the economy fails to fire up convincingly in coming months.” n n(This story has been refiled to restore the dropped word ‘Barr ‘ in the brokerage name in paragraph 20) n nReporting by Lucy Craymer Editing by Shri Navaratnam