By Lucy Craymer

WELLINGTON (Reuters) – New Zealand’s central bank has reduced its benchmark rate for the first time since March 2020, signaling further cuts ahead as inflation approaches its target of 1% to 3%. This dovish shift has led to a sell-off of the kiwi dollar.

The decision to cut the rate by 25 basis points to 5.25% surprised many market players, who had anticipated rate stability until 2025. Despite a nearly 70% chance of a quarter-point reduction being priced in following soft economic data, 19 of 31 economists predicted the RBNZ would maintain its stance since May 2023.

In its statement, the bank noted that the Committee agreed to reduce the official cash rate (OCR) and indicated that more cuts would depend on evolving inflation dynamics.

As a result of the announcement, the kiwi dollar dropped 1% to $0.6015. Swaps now imply another 32 basis points of easing by October and 71 basis points by year-end, with rates projected to be near 3.0% by the end of 2025, significantly below the RBNZ’s forecasts. Consequently, bank bill futures surged.

ASB Bank’s chief economist, Nick Tuffley, expects a consistent cut of 25 basis points in upcoming meetings, emphasizing that if inflation eases rapidly, the RBNZ may need to adjust toward a neutral rate of about 3.25%. Following the rate cut, ASB, Kiwibank, Westpac, and ANZ have lowered their mortgage lending rates.

The central bank remains cautious, indicating that policy must stay restrictive for some time, while projecting a cash rate of 3.85% by the end of 2025. Economists, including Abhijit Surya from Capital Economics, believe the RBNZ will adopt more aggressive rate cuts than expected.

RBNZ Governor Adrian Orr noted a decline in growth since May, with easing pricing pressures noted. He mentioned that New Zealand could face a technical recession, marked by two consecutive quarters of economic contraction, as experienced in 2022 and 2023.

NZ JOINS GLOBAL EASING
The RBNZ’s guidance indicates at least three more cuts by mid-next year, projecting a cash rate of 4.9% in Q4 2024 and 4.4% in Q2 2025, moving up the timeline for cuts anticipated previously. New Zealand is aligning with a global trend of easing rates, with other central banks like the ECB and the Bank of England also adopting rate cuts.

Conversely, Australia deviates from this trend; the Reserve Bank of Australia has dismissed immediate cuts. The RBNZ minutes highlight a risk shift since May, emphasizing apparent downside risks to output and employment due to a contracting economy.

The RBNZ previously led the way in withdrawing pandemic-era stimulus, increasing rates by 525 basis points since October 2021 to tackle inflation. Currently, New Zealand’s annual inflation has decreased to 3.3%, with expectations of returning to the 1% to 3% target band by Q3 this year.

Kiwibank’s chief economist, Jarrod Kerr, mentioned that the focus is now on the extent of necessary rate cuts, predicting 250 to 300 basis points of cuts this cycle to draw businesses’ and households’ attention.