WELLINGTON: New Zealand's central bank slashed its benchmark cash rate for the first time since March 2020, sending the local dollar tumbling as policymakers flagged more cuts over the coming months saying inflation was converging on its 1 per cent to 3 per cent target.
The decision to reduce rates by 25 basis points to 5.25 per cent came almost a year ahead of the Reserve Bank of New Zealand's (RBNZ) own projections, taking some market players by surprise and prompting bets of an aggressive easing path through to the end of 2025.
Markets had priced in almost a 70 per cent chance of a quarter-point reduction following a string of softer economic data, but the cut defied most economists' expectations, with 19 of 31 economists in a Reuters poll having forecast the RBNZ to hold steady as it has since May 2023.
"The Committee agreed to ease the level of monetary policy restraint by reducing the OCR (official cash rate)," the central bank said in its statement, and signalled more cuts ahead depending on how inflation evolves.
Investors reacted by knocking the kiwi dollar down 1 per cent to US$0.6015, erasing most of the 1 per cent gains made overnight as soft U.S. producer price data slugged the U.S. dollar.
Swaps shifted to imply another 29 basis points of easing by October and 67 basis points of easing by year end. Rates are seen near 3.0 per cent by the end of 2025, well below the RBNZ's projection. Bank bill futures also jumped.
ASB Bank chief economist Nick Tuffley said he expects the RBNZ will continue steadily cutting the cash rate by 25 basis points in consecutive meetings.
"If inflation pressures evaporate faster than expected, the RBNZ may need to hasten the return to a more neutral setting of around 3.25 per cent," Tuffley added. ASB Bank along with Kiwibank announced they would cut their mortgage lending rates.
The central bank did strike a note of caution, emphasising that policy will need to remain restrictive for a further period, but it still forecast the cash rate at 3.85 per cent by end-2025.
"Although the Bank seemed to strike a cautious tone about further policy easing, we think it will cut rates more aggressively than many are anticipating," Abhijit Surya, economist at Capital Economics.
Easy policy path
The RBNZ's forward guidance suggested at least three more cuts by the middle of next year, projecting the cash rate at 4.9 per cent in the fourth quarter of 2024 and 4.4 per cent in the second quarter of 2025. Previously, it had not expected to start cutting rates until the middle of 2025.
New Zealand joins other central banks that are starting to ease rates. The European Central Bank, Canada, Sweden and Switzerland have all cut interest rates and an increasing number of analysts are now pencilling in a half-a-percentage-point rate cut for the Federal Reserve's September meeting.
New Zealand's neighbour Australia, however, is an exception to the global easing trend, with the Reserve Bank of Australia last week ruling out near-term rate cuts.
The RBNZ minutes of the meeting, released alongside its statement, said the Committee observed that the balance of risks has progressively shifted since the May Monetary Policy Statement.
"With a broad range of indicators suggesting the economy is contracting faster than anticipated, the downside risks to output and employment that were highlighted in July have become more apparent," the minutes added.
A global front-runner in withdrawing pandemic-era stimulus, the RBNZ lifted rates 525 basis points since October 2021 to curb inflation in the most aggressive tightening since the official cash rate was introduced in 1999.
New Zealand's annual inflation has come off in recent months and is currently running at 3.3 per cent with expectations that it will return to the central bank's target band in the third quarter of this year.
The rate hikes have sharply slowed the economy with meagre first quarter growth and recent data indicating still-subdued momentum.
The RBNZ said a broad range of indicators suggested "the economy is contracting faster than anticipated," underlining why policymakers had to move quickly to ease monetary conditions.