On Wednesday, the Reserve Bank of New Zealand cut its benchmark rate by 50 basis points (Bps). This was done because inflation is approaching the target midpoint and because the country’s tight monetary policy is projected to keep economic growth muted in the foreseeable future.
Governor Adrian Orr’s Monetary Policy Committee decided to lower the Official Cash Rate from 5.25% to 4.755%. The meeting’s outcome was as anticipated.
Before this, in August, the bank lowered interest rates by 25 basis points; this was the first decrease since March 2020.
In a statement, the bank emphasized that “The Committee agreed that it is appropriate to cut the OCR by 50 basis points to achieve and maintain low and stable inflation while seeking to avoid unnecessary instability in output, employment, interest rates, and the exchange rate.” The bank added that “The Committee confirmed that future changes to the OCR would depend on its evolving assessment of the economy.”
Inflation Expected to Converge
It is anticipated that inflation will converge around the 2 percent target midpoint, as policymakers have noted that it is currently falling between the 1-3 percent target band.
The advantages of an OCR cut of 25 and 50 basis points were deliberated by the committee. They claimed that with the key rate at 4.75 percent, monetary policy is still in a strong position to handle any short-term shocks and remains restrictive.
Abhijit Surya, an economist at Capital Economics, predicted that the RBNZ would implement a few more rate reductions of 50 basis points in the coming months.
Furthermore, the economist stated that, in light of future developments, the RBNZ is expected to reduce its OCR to a trough of 2.25% by the end of 2025, a significant decrease from the 3.00% terminal rate that the expert consensus had forecast.
Conclusion
The Reserve Bank of New Zealand’s decision to cut its benchmark rate by 50 basis points reflects its efforts to balance inflation control with economic stability. By reducing the Official Cash Rate to 4.75%, the central bank aims to steer inflation toward its 2% target while maintaining a restrictive stance to handle potential shocks.
The larger-than-expected rate cut signals concerns over future economic growth, with the RBNZ expecting subdued expansion ahead. The move is seen as a proactive measure to avoid unnecessary instability, though experts like Abhijit Surya predict further cuts, potentially reducing the OCR to as low as 2.25% by 2025, signaling a cautious and adaptive monetary policy.
