The Reserve Bank of New Zealand (RBNZ) reduced its Official Cash Rate (OCR) by 50 basis points to 4.25% on Wednesday, marking its second consecutive half-point cut. However, the central bank signaled a shift to a slower pace of easing, projecting inflation to rise in 2025.
“Economic activity in New Zealand remains subdued and output continues to be below its potential,” the RBNZ said. “If economic conditions continue to evolve as projected, the Committee expects to be able to lower the OCR further early next year.”
The RBNZ forecasts the OCR to average 3.83% by mid-2025, suggesting smaller rate cuts ahead. Inflation is expected to rise from 2% in early 2025 to 2.5% by the third quarter, remaining above the 2% midpoint of the bank’s 1-3% target range.
By 1:00 pm AEDT (2:00 am GMT) the Kiwi dollar jumped 0.7% as traders adjusted their bets for more gradual easing. Yields on two-year notes also rose by four basis points to 5.79%.
The RBNZ reiterated that the economy likely contracted in Q3 2024, putting New Zealand back into recession. However, it expects growth to recover to 2.3% by March 2026 as lower interest rates boost demand.
“Economic growth is expected to recover during 2025, as lower interest rates encourage investment and other spending,” the RBNZ stated.
Despite its aggressive approach - cutting rates by 125 basis points in three months - the RBNZ projected the OCR could fall to 3.5% by late 2025, signaling smaller adjustments ahead.