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, a clear dovish signal that sent the kiwi dollar skidding as markets bet on more easing.
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 0.5% to $0.6102, the lowest since late August, while two-year swap rates declined 3 basis points to 3.6450% after the decision. Swaps imply there is further 40 basis points of easing to come at the RBNZ's November meeting.
Minutes from the RBNZ committee said it assessed that annual inflation is now within its 1% to 3% inflation target range and converging on the 2% midpoint.
This is the second consecutive meeting in which the central bank has cut the official cash rate.
ASB Bank expects another 50 bps cut when the central bank meets for the last time this year in November but expects moves in 2025 will be conditional on the state of the economy.
"The weakness of data through into early next year will influence how long the RBNZ keeps cutting in 50bp moves,” ASB Bank chief economist Nick Tuffley said.
New Zealand's annual inflation has come off in recent months. It was at 3.3% in the second quarter.
“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 added.
WEAKENED ECONOMY
The meeting minutes noted that the economy, which contracted in the second quarter after posting meagre growth in the first quarter, was subdued in part due to restrictive monetary policy.
"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.
Confidence improved slightly after the central bank’s decision to cut rates by 25 basis points 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. The Reserve Bank of Australia in September held rates steady, although it did soften its hawkish stance slightly.
In the wake of Wednesday's RBNZ decision, Bank of New Zealand announced it would cut its variable home loan rates by 50 basis points. This followed similar moves by other commercial banks to cut lending rates in recent days.
