The Reserve Bank of New Zealand slashed interest rates by 50 basis points to 4.75% on Wednesday to support an economy teetering on the brink of recession and keep pace with peers such as the Federal Reserve. This was the second consecutive rate cut after the central bank began its easing cycle with a 25 basis point cut in August.
"The board agreed that the economic environment provided scope for further easing of monetary policy constraints," the RBNZ said. "Growth was subdued, partly due to low productivity growth but mainly to weak consumer spending and business investment."
The RBNZ also listed a series of geopolitical risks facing the economy and mentioned the upcoming U.S. presidential election, pointing to potential risks surrounding government spending and global trade.
Economists now expect the Reserve Bank of New Zealand to make another sharp rate cut in November. Market pricing suggests that rate cuts will continue into next year, with the official cash rate falling to 3% by August next year. Kiwibank chief economist Jarrod Kerr said: "Economic data suggest it is necessary to return policy to neutral as soon as possible. The current economic environment remains sluggish and requires interest rate easing."
New Zealand's economy has stagnated, unemployment has risen and house prices have fallen as prolonged high borrowing costs have curbed demand. Economists say inflation is now slowing rapidly, with some warning it could fall below 2%, the midpoint of the Reserve Bank of New Zealand's 1-3% target range.
After the decision was announced, the New Zealand dollar fell more than 0.50% against the US dollar during the day. Today's interest rate decision is a policy review and is not accompanied by new economic forecasts or a press conference.
The shift to a deeper rate cut represents another abrupt change of stance by the RBNZ.
The Reserve Bank said in May that it would not begin to ease policy until the second half of 2025. After the meeting on August 14 this year, Reserve Bank of New Zealand Governor Orr said the central bank intended to act "calmly and at a cautious pace."
The Reserve Bank of New Zealand's latest forecasts in August showed annual inflation falling to 2.3% in the third quarter from 3.3% in the second quarter. The data will be released on October 16. GDP fell 0.2% in the three months to June, putting the economy on the brink of its second recession in less than two years. Slowing demand is expected to push up unemployment when third-quarter data is released in early November.
Many central banks around the world have already started cutting rates, with the Federal Reserve kicking off its easing cycle with a 50 basis point cut last month. The Reserve Bank of Australia was a notable exception, keeping its key rate steady at 4.35% due to the risks of rising inflation.
Before today's decision, most economists surveyed expected the RBNZ to cut interest rates by 50 basis points at its last meeting of the year on November 27.
The article is forwarded from: Jinshi Data