(Bloomberg) — New Zealand’s central bank will slow the pace of interest-rate cuts after a third straight reduction of 50 basis points, saying lower borrowing costs should begin to stoke an economic recovery.
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The Reserve Bank’s Monetary Policy Committee lowered the Official Cash Rate to 3.75% from 4.25% Wednesday in Wellington, as anticipated by all 23 economists in a Bloomberg survey. It will likely follow with 25-point cuts at its April and May policy meetings, Governor Adrian Orr told reporters at a press conference.
“We are looking at lowering the Official Cash Rate a little bit quicker than what we projected back in November, but that’s around 50 basis points by mid this year,” Orr said. “That comes broadly in two 25 basis-point steps. It doesn’t stop there. We have our projection of the OCR being around 3% by year-end.”
While Orr expressed confidence that inflation is tamed, the RBNZ’s new forecasts show it re-accelerating to 2.7% later this year, which may give policymakers further reason to tone down their aggressive easing stance. The re-election of Donald Trump as US president and his threat of tariffs has also increased uncertainty over the global growth and inflation outlook.
The New Zealand dollar initially fell after the decision before reversing losses after Orr indicated smaller rate cuts ahead. It bought 57.20 US cents at 4:50 p.m. in Wellington. The yield on policy sensitive two-year bonds also erased an earlier drop.
Forward Guidance
The RBNZ’s forward guidance shows the average OCR falling to 3.14% by the end of the year, lower than the 3.55% it projected in its November policy statement. The forecasts show the benchmark rate dropping to 3.1% in early 2026 and remaining there over the forecast horizon, suggesting the RBNZ expects to conclude its easing cycle without taking the OCR below 3%.
In its record of meeting, the RBNZ’s policy committee said it expects inflation to remain around target sustainably, despite some volatility this year.
“This provides the context and the confidence for the Committee to continue lowering the OCR,” it said.
Sharon Zollner, chief New Zealand economist at ANZ Bank in Auckland, said the RBNZ sounded very confident about the inflation outlook, and the economy is clearly responding to lower interest rates.
However, “how vigorous and sustained the recovery will be remains a matter of some conjecture,” she said. “It makes sense for the RBNZ to remain open-minded on all those points now a lot of the legwork of getting the OCR lower is behind it.”
What Bloomberg Economics Says…
“The danger is that growth and inflation undershoot the central bank’s forecasts over the medium term. We think the RBNZ will deliver a further 125 basis points of rate cuts over the next 12 months — taking the Official Cash Rate below neutral.”
— James McIntyre, economist
To read the full note, click here
Lower borrowing costs will be welcomed by the center-right government, which is promising to restore economic growth as it eyes an election due in late 2026.
The RBNZ reiterated its expectation that the economy will recover modestly in 2025 after a contraction last year that saw gross domestic product shrink 2.1% in the six months through September. Annual growth will be 1.8% in the year through March 2026 after a 1.2% contraction in the year ending March 2025, the RBNZ’s new forecasts show.
“Lower interest rates will encourage spending, although elevated global economic uncertainty is expected to weigh on business investment decisions,” the RBNZ said. “Geopolitics, including uncertainty about trade barriers, is likely to weaken global growth.”
Aggressive Cuts
After starting its easing cycle in August, the RBNZ has been one of the most aggressive rate cutters among its peers, lowering the OCR by 175 points.
By contrast, the Federal Reserve paused after 100 points of reductions in the final months of 2024, while the Reserve Bank of Australia only began to ease yesterday with a 25-point move and said it will take a cautious approach to further cuts.
The RBNZ’s updated forecasts show inflation at 2.4% in the first quarter from 2.2% at the end of last year, but after picking up mid-year it is seen slowing to 2.2% again by early 2026. The central bank aims for the 2% mid-point of its 1-3% target band.
“Inflation in New Zealand is expected to be volatile in the near term, due to a lower exchange rate and higher petrol prices,” the RBNZ said. “The net effect of future changes in trade policy on inflation in New Zealand is currently unclear. Nevertheless, the Committee is well placed to maintain price stability over the medium term.”
