The Reserve Bank has reduced the official cash rate by 25 basis points, marking the first cut in over four years. This decision comes as the central bank observes cooling price pressures and anticipates annual inflation to fall within its 1 to 3 percent target range by the September quarter.
Updated projections indicate that the cash rate could drop to 4.9 percent by the end of the year, suggesting the possibility of further cuts in October and November. Prior to this announcement, financial markets had predicted a 75 percent chance of a 25-basis point rate cut, while economists were more divided, with a slight preference towards maintaining the current rates.
In its statement, the Reserve Bank of New Zealand (RBNZ) noted that consumer price inflation is easing. “Although services inflation remains elevated, it is expected to continue declining both domestically and internationally, aligning with increased economic capacity,” the statement said. The RBNZ also projected that consumer price inflation in New Zealand would remain near the midpoint of its target range for the foreseeable future.
Following the rate cut announcement, the New Zealand dollar fell by about a third of a cent to 60.4 US cents. The RBNZ emphasized that the pace of future rate cuts would depend on the monetary policy committee’s confidence that pricing behavior aligns with a low-inflation environment and that inflation expectations are anchored around the 2 percent target.
In response to the rate cut, Kiwibank promptly reduced various lending and deposit rates, including a 25-basis point reduction in its variable term loan. Wholesale interest rates have also been declining recently as financial markets anticipated the first rate drop since March 2020.
The Reserve Bank began raising the cash rate in late 2021 to combat high inflation, pushing the OCR to a peak of 5.5 percent in May last year. However, recent economic data shows a slowdown in inflation, rising unemployment, and stalling economic growth. -TIN Bureau