The Reserve Bank of New Zealand (RBNZ) is the first in the region to conduct a policy review since the U.S. imposed sweeping import tariffs last week, causing global markets to spiral as policymakers grapple with heightened recession risks.

The central bank cut the benchmark rate by 25 basis points to 3.50%, as widely expected, heightening economists' expectations for looser policy settings than previously expected.

In minutes of the meeting, the Committee agreed that a 25 basis point reduction in the official cash rate (OCR) would be consistent with their mandate of maintaining low and stable inflation.

"The recently announced increases in global trade barriers weaken the outlook for global economic activity. On balance, these developments create downside risks to the outlook for economic activity and inflation in New Zealand," the RBNZ said.

"As the extent and effect of tariff policies become clearer, the Committee has scope to lower the OCR further as appropriate," the minutes added.

All 31 economists in a Reuters poll had forecast the rate cut. The New Zealand dollar rose 0.3% to $0.5550, coming off a five-year low. Markets are now pricing in a 95% chance for a cut in May and for rates to be at 2.67% by the end of 2025.

Capital Economics said the RBNZ statement was rather dovish signalling that further easing would be forthcoming in the months ahead.

"We think the Bank will ultimately loosen policy settings to a greater degree than most are currently predicting," it added.

The RBNZ statement added that having consumer price inflation close to the middle of its target band of 1% to 3% puts the Committee in the best position to respond to developments.

TARIFF RISKS

New Zealand, which faces a 10% tariff on exports to the U.S., is expected to fare relatively well as a soft New Zealand dollar offsets much of the impact but will be hit by weak economies of trading partners, economists have said.

New Zealand's economy emerged from recession in the fourth quarter of 2024 with 0.7% quarterly growth. However, employment is expected to continue to rise in the first half of this year and sentiment remains soft.

The RBNZ said in its statement that household spending and residential investment remain weak.

ASB chief economist Nick Tuffley said it expects the central bank will have to cut to a stimulatory level and is pencilling in the cash rate falling to 2.75% from a previous expectation of 3.25%.

"If the tariff war gets dialled back in tempo to more of a skirmish, then the RBNZ may not need to cut the OCR to a sub-neutral rate. But it appears that would take a lot of negotiation or position reversal," Tuffley added in note.

The RBNZ's move on Wednesday marks the first interest rate decision since Christian Hawkesby took up the role of governor following Adrian Orr's unexpected resignation in March.

New Zealand, which has cut rates by 200 basis points since August, is one of several central banks around the globe that have started cutting rates as inflation has eased. Concerns around a global downturn are now adding to their concerns.

The central bank is not due to release updated economic forecasts until it meets in May.