The Reserve Bank of New Zealand (RBNZ) building in Wellington, New Zealand, on Wednesday, Feb. 22, 2023.
Mark Coote | Bloomberg | Getty Images
New Zealand’s central bank on Wednesday slashed benchmark rates by 50 basis points to 3.75%, marking its fourth straight cut, as easing inflation offers the central bank room to boost a sputtering economy.
The move was in line with expectations from economists polled by Reuters, and marks the lowest the policy rate since November 2022.
In its monetary policy statement, the Reserve Bank of New Zealand said inflation remained near the mid-point of its target band of 1%-3%, prompting it to lower rates.
New Zealand reported headline inflation rate of 2.2% in the quarter ended December 2024, with price growth falling for seven of the last eight quarters, according to LSEG data.
The rate cut also comes at a time when the country’s growth has been declining on a year-on-year basis for five straight quarters to September 2024, according to government data.
The New Zealand dollar strengthened by 0.4% to trade at 0.568 against the greenback.
The central bank is optimistic that economic growth will recover in 2025. “Lower interest rates will encourage spending, although elevated global economic uncertainty is expected to weigh on business investment decisions,” RBNZ said.
The bank, however, warned that consumer inflation in New Zealand was expected to be volatile in the near term, due to a lower exchange rate and higher petrol prices.
“The net effect of future changes in trade policy on inflation in New Zealand is currently unclear,” RBNZ said, adding that if economic conditions continue to evolve as projected, the policy rate could be lowered further in 2025.
RBNZ’s revised inflation forecasts for the year ahead reflect the Bank’s concerns about higher oil prices and a weaker New Zealand dollar, said Abhijit Surya, senior APAC economist at Capital Economics.
He pointed out that the RBNZ has confidence that price pressures owed to domestic factors will continue to abate, as the economy has excess capacity.
While the bank is now forecasting to bring down the policy rate to 3% by the end of 2025, it will “eventually” cut rates to 2.25%, Surya said, without specifying a timeframe.