- Reserve Bank cuts official cash rate 50 basis points to 3.75%
- OCR cut the third consecutive big reduction - at its lowest since October 2022
- RBNZ says economy performing largely as expected
- The speed and extent of further OCR cuts to a neutral level depends on data
- Uncertain local and global outlook adds to caution
- Retail banks cut floating mortgages, but most leave fixed rates unchanged
The Reserve Bank has delivered the widely expected half a percentage point (50 basis points) cut to the official cash rate to a two-year low of 3.75%, but signalled it will be more cautious with further reductions.
It was the third consecutive big-sized cut and had been signalled by the central bank last year.
"The economic outlook remains consistent with inflation remaining in the band over the medium term, giving the Committee confidence to continue lowering the OCR," the Monetary policy Committee said in a statement at 2pm today.
It was cautious about the speed and size of future rate cuts.
An indicative forecast in the monetary statement suggested a slower rate of cuts this year, with the cash rate falling to around 3% by the end of 2026, RNZ reported.
Economists had overwhelmingly forecast the big cut as the economy remained weak, households and businesses kept tight control on spending and investment, and the unemployment rate kept rising.
The RBNZ acknowledged the weak state of the economy, with rising unemployment, subdued household spending and investment, but said there were signs of improvement with inflation was in its 1 to 3% target band.
"Economic growth is expected to recover during 2025. Lower interest rates will encourage spending, although elevated global economic uncertainty is expected to weigh on business investment decisions."
The central bank said it expected the economy to continue to recover gradually, with the labour market improving in the second half of the year, while it expected inflation to remain in the target band.
"If economic conditions continue to evolve as projected, the Committee has scope to lower the OCR further through 2025."
The Monetary policy Committee said external risks from geopolitical tensions and political uncertainty could stoke economic and inflation volatility.
Retail banks - ASB, BNZ, Westpac, Kiwibank and Co-op Bank - immediately dropped their floating or variable lending rates, but only Westpac shaved a little off fixed term rates, which most mortgage borrowers are on.
Green Party co-leader Chloe Swarbrick said the change was good news for people with a mortgage but said the government had inflicted pain on the economy through cuts to jobs and public services.
The RBNZ's next update was scheduled for April 9.
Good news for Kiwis: Willis
Finance Minister Nicola Willis said the RBNZ's positive economic outlook indicates the economy is growing and people can look forward to more jobs and opportunities.
“This is good news for New Zealanders. A growing economy means more money in people’s pockets, more jobs and more opportunities," she said in a statement this afternoon.
“The government knows many families and businesses are doing it tough, but evidence is mounting that they can look forward to better times. Today’s reduction in the Official Cash Rate is the fourth since August last year and confirms inflation is firmly back under control."
Willis said the OCR had fallen 1.75 points since August to 3.75% and further reductions would put more downward pressure on interest rates.
“That is good news for businesses as well as families. More money in people’s pockets means more money flowing through tills."
She said there were signs that was already happening.
"Business and consumer confidence are both trending upwards and last week the BNZ and Business NZ reported that growth in manufacturing had risen to its highest level since September 2022. After a period of decades-high inflation, high interest rates and cost-of-living pressures, the economy is heading in the right direction.”
Admission of failure, says union
But Taxpayers’ Union Spokesman James Ross called today's rate drop “an admission of failure by the Reserve Bank Governor.”
“The Reserve Bank being too slow off the mark to cut interest rates has driven the country into the worst economic downturn in three decades. With more than two-and-a-half times the staff now than the Bank had in 2018, clearly too many cooks spoiled the broth."
In a statement today, Ross said to get out of recession there needed to be serious growth.
“That means attracting investment, and the corporate tax reforms to fuel it.
"With Budget 2025 just around the corner, now’s the time for Nicola Willis to be drafting plans for a pro-growth agenda, including high bang-for-buck policies like full capital expensing.”
Global tariff, economic uncertainty
The Reserve Bank has now cut rates by 175 basis points since August last year, with a slowdown in inflation giving MPs leeway to extend their easing efforts in a much needed boost for an economy struggling to emerge from a deep recession.
The central bank said it was well placed to maintain price stability over the medium term and respond to future inflationary shocks, but added that global uncertainty over tariff policies pose some risks to the economy, Reuters reports.
“The RBNZ’s aggressive 50-basis point cut to 3.75% shows its determination to revive the economy, despite inflation risks and global uncertainties like Donald Trump's re-election as US President," Saxo Asia Pacific Senior Sales Trader Junvum Kim.
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 OCR was introduced in 1999.
The punishing borrowing costs, however, took a heavy toll on demand and tipped the economy into recession in the third quarter of last year - the worst downturn outside of the pandemic since 1991.
The weakened state of the economy has added urgency to MPs efforts to stimulate demand. The coalition government has already abandoned hopes for a return to budget surpluses, seeing deficits for the next five years.
New Zealand's annual inflation has come off in recent months and is currently at 2.2%, but the central bank said a volatile period ahead will probably see it increase to 2.7% in the third quarter before moderating again.
New Zealand is one of several countries to ease rates as inflation has moved lower, but its sharp reductions to borrowing costs contrast with a more cautious approach by the US Federal Reserve and its counterpart in Australia.
The Reserve Bank of Australia on Tuesday delivered the first cut in interest rates in more than four years but signalled a cautious approach to any further easing.
Trade and other broader economic policies under United States President Donald Trump's second term in power have also raised policy uncertainty around the world due to the renewed risk of inflation.
"Lower interest rates will encourage spending, although elevated global economic uncertainty is expected to weigh on business investment decisions," the RBNZ said.
- RNZ, APL and Reuters
