The Reserve Bank has lowered its benchmark cash rate by 50 basis points. The central bank reduced the official cash rate (OCR) to 4.75 percent, marking its lowest point in 18 months. This larger-than-expected rate cut was deemed necessary due to easing inflation and the underperformance of the economy.
The Monetary Policy Committee (MPC), composed of seven members, made the decision after a meeting on Wednesday, lowering the OCR from 5.25%. According to a statement from the RBNZ, annual inflation is now within the target range and is “converging on the 2% midpoint.”
“The New Zealand economy has reached a position of excess capacity, encouraging price- and wage-setting behaviour to adjust to a low-inflation environment,” the media release stated. It further noted that lower import prices have also contributed to the disinflation process. The committee emphasized that the 50-basis point cut was aimed at maintaining low and stable inflation while avoiding unnecessary instability in economic output, employment, interest rates, and the exchange rate.
This rate cut follows a 25-basis point reduction at the RBNZ’s previous meeting in August when the economy was showing signs of faltering faster than the bank had predicted in its May forecast. The decision to cut 50 basis points, though largely expected by economists and financial markets, exceeded the bank’s earlier indication that a 25-basis point cut would suffice.
Following the announcement, the New Zealand benchmark stock index saw a nearly 0.5% increase, while the Kiwi dollar depreciated by 0.4% against both the US and Australian dollars. The central bank’s decision appeared to instil some optimism in the stock market but was met with a slight dip in the local currency.
A recent survey revealed that pricing intentions have dropped to levels not seen since before the COVID-19 pandemic. Additionally, the headline annual inflation rate for September is anticipated to be on target, with official figures expected to be released next week. However, despite inflation nearing the 2% midpoint, concerns have arisen around economic activity and the labour market. Data suggests that economic growth is weakening, and unemployment could rise to 6%, raising fears of potential deflation.
ANZ’s chief economist, Sharon Zollner, expressed confidence that the RBNZ had done enough to curb inflation. Similarly, economists at ASB have voiced concerns that the current interest rates remain highly restrictive, even though inflationary pressures have normalized and capacity constraints have eased.
In August, the RBNZ had forecast a gradual reduction in the OCR toward 3% over the next 18 months, assuming pricing behaviours remain aligned with a low-inflation environment. The bank now finds itself navigating the balance between encouraging economic growth and maintaining price stability.
On Wednesday, the RBNZ’s MPC highlighted that the economy had evolved largely as expected over the past two months, with economic activity falling below its potential. “Increasing excess capacity is leading to lower inflationary pressure in the New Zealand economy,” the committee noted. Weak economic growth, attributed to sluggish productivity gains, declining consumer spending, and weak business investment, has contributed to this scenario.
Despite these challenges, the committee expressed confidence that the upcoming consumer price index (CPI) report for the September quarter would confirm annual inflation comfortably within the RBNZ’s 1%-3% target range, possibly nearing the 2% midpoint. Business visits conducted by the RBNZ indicated that weak demand is preventing businesses from passing on higher input costs to consumers.
During their discussions, policymakers considered both a 25-basis point and a 50-basis point cut. They ultimately reached a consensus that the larger cut would provide a better safeguard against potential economic instability. Although the RBNZ’s mandate for price stability has been streamlined—no longer prioritizing full employment as a secondary objective—the bank remains committed to minimizing unnecessary volatility in output, employment, interest rates, and the exchange rate.
The current OCR of 4.75% is viewed as restrictive enough to address any near-term surprises. Future changes to the OCR, the committee said, would depend on how the economic situation continues to unfold. -TIN Bureau