New Zealand Central Bank May Cut Rates Sooner Than Expected
New Zealand’s central bank is expected to cut interest rates on Wednesday, potentially a year earlier than previously indicated, as economic conditions shift. The Reserve Bank of New Zealand (RBNZ) faces mounting pressure to ease its monetary policy amid slowing inflation, rising unemployment, and subdued economic growth.
According to a recent Reuters poll of 31 analysts, opinions are divided. While 19 analysts expect the RBNZ to maintain the current cash rate of 5.5%, a dozen anticipate a 25 basis point cut. The central bank’s decision is anticipated to be a close call, reflecting the current economic uncertainty.
Markets have priced in a 76% probability of a rate cut, buoyed by a recent central bank survey that revealed inflation expectations have fallen to their lowest level in three years. This is a significant shift from the RBNZ’s forward guidance in May, which suggested that lower borrowing costs might not be seen until mid-2025.
The RBNZ, having been among the first to withdraw pandemic-era monetary stimulus, has kept the cash rate at 5.5% since May 2023 in an effort to combat high inflation. However, the current economic landscape, characterized by a contracting economy, rising spare capacity, and a high unemployment rate, suggests that the pressures on inflation are easing.
Stephen Toplis, head of research at Bank of New Zealand, noted, “The New Zealand economy is contracting, spare capacity is rising rapidly, and the unemployment rate is some way from its peak. This is alleviating pressure on inflation, and lower wage growth will help bring down stubborn non-tradables inflation.” He added that all conditions appear to support a rate cut at this time.
Should the RBNZ decide to hold rates steady, many analysts still anticipate that the central bank will revise its forecasts. Most of the economists surveyed by Reuters expect the RBNZ to begin cutting rates later this year, with a majority predicting the cash rate will drop to 5.0% by year-end.
Westpac industry economist Paul Clark expects the RBNZ to maintain the current rate at 5.5% but anticipates that the bank will signal future rate cuts and make significant downward revisions to its rate projections for 2025.
