The Reserve Bank of New Zealand cut its benchmark rate for the first time since March 2020 and hinted at additional cuts over the next few months, stating that inflation was nearing its 1 to 3 percent target. The decision to reduce rates by 25 basis points to 5.25 percent came almost a year ahead of the central bank’s projections, surprising market players.
Rate cut projections
The central bank suggested at least three more cuts by the middle of next year, projecting the cash rate at 4.9 percent in the fourth quarter of 2024 and 4.4 percent in the second quarter of 2025.
“Services inflation remains elevated but is also expected to continue to decline, both at home and abroad, in line with increased spare economic capacity,” said the central bank in its latest policy statement. The reserve bank also expects consumer price inflation to remain near the target mid-point over the foreseeable future.
New Zealand’s central bank added that the pace of further rate easing will depend on the central bank committee’s confidence that pricing behavior remains consistent with a low inflation environment and that inflation expectations remain around the 2 percent target.
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Constraining domestic demand
While official economic statistics have evolved in line with expectations in the May monetary policy statement, a broad range of high-frequency indicators point to a material weakening in domestic economic activity across the country in recent months.
In addition to the constraining domestic demand, falling net migration may have also played a role in economic constrain, prompting the New Zealand central bank to cut rates.
Following the decision, the New Zealand dollar index dipped 0.96 percent to 69.87, erasing most of the 1 percent gains it made overnight as soft U.S. producer price data slugged the U.S. dollar.
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