By Lucy Craymer

WELLINGTON (Reuters)

New Zealand's central bank cut rates by 50 basis points on Wednesday, lowering the cash rate to 4.75%, aligning with market expectations and economists' forecasts. Despite inflation returning to target levels, the bank noted that policy remains restrictive, prompting market speculation for further aggressive easing and a decline in the kiwi dollar.

The Reserve Bank of New Zealand (RBNZ) stated, "The Committee agreed that it is appropriate to cut the OCR (official cash rate) by 50 basis points to achieve and maintain low and stable inflation, while seeking to avoid unnecessary instability in output, employment, interest rates, and the exchange rate."
Following this decision, the kiwi fell 0.9% to $0.6084, hitting its lowest level since August 19, and two-year swap rates dropped by 7 basis points to 3.605%, indicating the market's expectation of an additional 45 basis points cut at the RBNZ's November meeting.

Shannon Nicoll, an associate economist at Moody’s Analytics, mentioned that the October meeting supports the bank's dovish policy stance. With inflation within target and a fragile labor market, the RBNZ is likely to proceed with rapid rate cuts.

According to the minutes from the RBNZ committee, annual inflation has returned to within the target range of 1% to 3% in Q3 and is approaching the midpoint of 2%. Recent data reflects an annual inflation rate of 3.3% in the second quarter.

The bank indicated that the current OCR of 4.75% is still restrictive and is positioned to address any short-term surprises. This marks the second consecutive meeting where the RBNZ has cut the official cash rate, following a prior 25-basis-point reduction in August.

Sharon Zollner, ANZ chief economist, stated that while future moves depend on data, there was nothing indicating a halt to the market's expectation of a follow-up 50bps cut in November. Meanwhile, Citi economists forecast a more significant 75 basis point cut next month, citing no need for the cash rate to remain so restrictive with the considerable gap until the next policy review in February.

WEAKENED ECONOMY

The RBNZ highlighted that the economy, which shrank in Q2, is expected to remain subdued due to soft house price growth and decreased net immigration affecting overall demand. The committee also expressed concerns about potential spillover effects from the escalating conflict in the Middle East, which could pose significant risks to global economic activity and energy prices. Furthermore, anticipated slowdowns in growth for the U.S. and China were noted.

Although confidence improved slightly post-rate cut in August, where the bank forecasted the cash rate to fall to 3.85% by the end of 2025, it underscores a broader market consensus for more stimulative measures. New Zealand's rate cuts mirror the trend seen among many global central banks as they reverse aggressive tightening measures aimed at curbing inflation.

In contrast, Australia's central bank remains an outlier in this easing trend, maintaining that restrictive conditions must persist longer to manage inflation effectively. ASB Bank remarked that the RBNZ's latest decision illustrates that rates are still higher than neutral settings.

Nick Tuffley, ASB chief economist, noted, "Cutting by 50bp more than once would make the RBNZ a bit of a central bank maverick," indicating the current OCR still exceeds the neutral range of 3-4%.