By Lucy Craymer
WELLINGTON (Reuters) -New Zealand’s central bank surprised some in the markets by slashing its benchmark rate by 50 basis points to 2.50% on Wednesday, and kept the door open for further easing, suggesting policymakers were worried about the frail state of the economy.
The New Zealand dollar and interest rate swaps tumbled in the wake of the move, as investors bet on more stimulus in the coming months to shore up demand.
“The Committee reached consensus to reduce the official cash rate by 50 basis points to 2.5 percent,” the RBNZ said in its accompanying policy statement. “The Committee remains open to further reductions in the OCR as required for inflation to settle sustainably near the 2 % target mid-point in the medium term.”
The dovish stance will be a welcome relief for the New Zealand government and the country’s prime minister, Christopher Luxon, whose popularity has taken a sharp hit in recent months as the economic recovery he campaigned on has failed to eventuate.
Luxon has said publicly he would like to see the cash rate lower to try and shake off the economic torpor, with households in a depressed mood as they fret about the rising cost of living and scarcity of jobs.
The RBNZ decision went against 15 of 26 economists surveyed in a Reuters poll who had forecast the Reserve Bank of New Zealand would cut the official cash rate by 25 basis points.
However, the larger cut wasn’t totally unexpected as the remaining 11 economists had picked a 50-bp reduction and markets were primed for the RBNZ to pull harder on its monetary policy levers to inject impetus to a weakened economy.
The New Zealand dollar fell 0.90% to $0.5745, while two-year interest rate swaps fell to 2.521% from 2.6194% before the decision.
“The RBNZ’s decision signals that the likelihood of inflation pressures being weaker than previously anticipated carried more weight than waiting to see how quickly the economy rebounds and what ripple effects come from the current spike in inflation,” ASB chief economist Nick Tuffley said in a note.
The central bank has cut rates by 300 basis points since August 2024, and with inflation within its target band of 1% to 3%, policymakers have leeway to lower borrowing costs further.
(Reporting by Lucy CraymerEditing by Shri Navaratnam)
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