Reserve Bank of New Zealand cuts cash rate by 50bp, as expected

Reserve Bank of New Zealand

In summary from the statement: The Monetary Policy Committee (MPC) has reduced the Official Cash Rate (OCR) by 50 basis points to 4.25%.

• Inflation: Annual inflation has decreased and is near the 1–3% target midpoint. Inflation expectations and core inflation are also aligning with this midpoint. Further OCR reductions are anticipated early next year if economic conditions remain on track.
• Economic Conditions: Economic activity in New Zealand is subdued, with output below potential and excess capacity reducing inflation pressures. Falling import prices and stabilized domestic price and wage behaviors are contributing to lower inflation.
• Future Outlook: Economic growth is expected to recover in 2025, driven by lower interest rates. Employment growth will likely remain weak until mid-2025, with some ongoing financial stress for households.
• Global Factors: Global growth is forecasted to stay subdued, with geopolitical and policy uncertainties potentially increasing economic and inflation volatility.
• Policy Stance: The MPC emphasized that maintaining inflation near the midpoint of the target band ensures flexibility to address future inflationary shocks.

From the meeting minutes, in brief:

1. Monetary Policy Decision:

   • The Monetary Policy Committee (MPC) reduced the Official Cash Rate (OCR) by 50 basis points, reflecting confidence that inflation is sustainably within the 1–3% target range.
   • Core inflation is converging toward the target midpoint, and subdued domestic demand has eased inflation pressures.

2. Economic Conditions:

   • Domestic economic activity remains below trend, with weakness in construction, manufacturing, and retail. Some services sectors continue to grow.
   • Economic growth is expected to recover gradually from late 2024 due to lower interest rates, but the timing and speed of recovery remain uncertain.

3. Labour Market:

   • Wage growth is slowing, employment levels are declining, and unemployment is expected to rise further.
   • Net immigration has significantly reduced, partly due to subdued labour market conditions.

4. Global Outlook:

   • Global economic growth remains subdued, with slowdowns expected in the U.S., China, and Europe. Risks from geopolitical and climate-related events could increase inflation volatility.

5. Financial Stability:

   • The banking system remains strong, and there is no significant trade-off between inflation control and financial stability, despite rising financial stress in some households and businesses.

6. Inflation and Risks:

   • Headline and core inflation are near the target midpoint, with price and wage-setting behaviors aligning with the inflation target.
   • Near-term risks include the persistence of some inflation components and uncertainty about the pace of economic recovery.
   • Medium-term risks include geopolitical tensions and climate-related disruptions, potentially causing inflation volatility.

7. Outlook for Policy:

   • Lower OCR is passing through to mortgage rates, with further reductions in borrowing costs expected.
   • If economic conditions align with projections, the MPC anticipates additional OCR cuts early next year.

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The background to this meeting are the cuts in August and October:

• August: The RBNZ reduced the Official Cash Rate (OCR) by 25 basis points, bringing it down to 5.25%. This marked the first rate cut since March 2020, signaling a shift from the previous tightening stance.

• October 2024: In response to a weakening economy and subdued inflation, the RBNZ implemented a more substantial cut of 50 basis points, lowering the OCR to 4.75%. This decision aimed to provide additional stimulus to the economy.

This article was written by Eamonn Sheridan at www.forexlive.com.