RBNZ Unexpectedly Cuts Interest Rates

Investing.com — The Reserve Bank of New Zealand (RBNZ) unexpectedly cut interest rates on Wednesday, citing progress towards its annual inflation target and weak local economic growth.

The RBNZ reduced its official cash rate to 5.25% from 5.5%, surprising analysts who anticipated the rate would remain steady for a ninth consecutive meeting. However, some market analysts had predicted a potential cut after the central bank’s dovish tone in its May meeting.

The RBNZ highlighted progress in bringing consumer price inflation back within its target range of 1% to 3%, stating that inflation is expected to fall within the target band by the September quarter.

Despite this, the RBNZ observed sluggish economic growth, particularly due to weak export demand from China, its top market. Additionally, the bank warned about the potential impact of higher import prices pushing inflation upwards.

Market expectations suggest a 100 basis point rate cut by mid-2025, but the RBNZ emphasized that further rate changes will depend on upcoming economic data.

Wednesday’s cut aligns the RBNZ with several global peers reducing interest rates as post-COVID inflation subsides. The RBNZ was the first among its peers to raise rates after the pandemic, starting mid-2021.

However, the RBNZ’s inflation reduction efforts faced challenges due to adverse weather conditions in early 2023, leading to a temporary increase in inflation.

As a result of the cut, the New Zealand dollar weakened sharply, with the NZDUSD pair dropping nearly 0.7%.