New Zealand’s central bank’s decision to cut the official cash rate (OCR) by 25 basis points, from 5.5 to 5.25 percent, has shocked the market and economists. This is a complete about-face from what it said just a month ago.
The Reserve Bank of New Zealand (RBNZ) had stuck to the 5.5 percent rate for over a year through several reviews. Its most recent forecast in May gave a 60 percent chance of another increase in the OCR (to 5.75 percent), while warning cuts were off the table until the second half of 2025.
However, worsening economic conditions and the prospect of the country heading into another recession saw its Monetary Policy Committee change its mind.
In a statement, the committee said that “the economy is contracting faster than anticipated, [and] the downside risks to output and employment that were highlighted in July have become more apparent. Members were also concerned about avoiding unnecessary near-term instability in output and employment.”
After predicting that inflation would not return to the 1–3 percent target range until the final quarter of this year—meaning January to March 2025—it now says it’s confident that it will reach 2.3 percent by the end of the September quarter.
Headed Into Recession
While the cut is good news for anyone with a mortgage, the reasons behind it is concerning. RBNZ Governor Adrian Orr said “the darkest period” was where the economy was right now.
The RBNZ is forecasting another recession (as defined by two consecutive negative quarters of GDP contraction)—that June quarter GDP will have shrunk by 0.5 percent, with a 0.2 percent fall in the September quarter.
If it’s right, the country will have had negative GDP growth in six out of nine quarters.
The central bank also thinks house prices will grow this calendar year by a mere 0.1 percent—another major change from its May forecast of 2.3 percent.
Unemployment, too, is projected to worsen. Previously, the RBNZ expected the rate to peak at 5.1 percent. Now, it sees it reaching 5.4 percent in March of next year.
The only ray of hope in the bank’s latest Monetary Policy Statement is that the bank now says another OCR cut is likely before the end of 2024, possibly even two.
Economists now predict a drop to at least 5 percent by the end of the year and to at least 4.5 percent by June next year.
Asked at a press conference about the surprising change in tactics, Orr asked reporters to properly explain the reasoning behind the OCR cut to their audience.
“People, please understand the conditionality of economic forecasts ... you need to explain that to your readers. For us to have talked about a cut back in May would have been negligent,” he said.
“When the facts change, the decisions change.”
Positive Reactions
Chief Economist at Betashares—an Australian fund manager launched in New Zealand in May—David Bassanese said New Zealand had “front-footed its fight to tame inflation with higher interest rates, but these efforts are taking a toll on the economy.”“The RBNZ’s shift towards rate cuts will help support the economy and offer some relief to households amid the uncertain outlook,” he said.
Ray White Group chief economist Nerida Conisbee said that New Zealand had followed other countries in reducing its OCRs.
“The Bank of England cut rates two weeks ago. The U.S. is set to move next month, with the jobless rate in that country recently hitting its highest level in three years. These countries joined Switzerland, Sweden, the European Union, and Canada, which were the first to move.
Politicians Claim Credit
Meanwhile, Prime Minister Christopher Luxon told a press conference that inflation was now “tracking down fast,” while food prices had also fallen. He called today’s decision “encouraging.”“This is the start on the pathway to lower interest rates,” he said. “Yes, it is still incredibly tough for Kiwis ... and there is still a long way to go.”
The government will now focus on creating the conditions for economic growth.
“We have done everything we can to make sure we play our role to get fiscal discipline in place,” he said.
Finance Minister Nicola Willis, who joined him at the press conference, said the cost-of-living crisis had been driven by high inflation and high interest rates, and today’s OCR reduction showed that the era of high price increases was over.
“Things are going to get better. It is cloudy, but rays of light are getting through,” she said. “Green shoots of recovery are possible. Today’s announcement is an encouraging sign we are getting New Zealand back on track.”
