A significant fall in inflation and a “subdued” economy has convinced the Reserve Bank of New Zealand (RBNZ) to cut the official cash rate (OCR) by 50 basis points to 4.75 percent.
It says consumer price inflation is within its 1 to 3 percent target range, and converging on the 2 percent midpoint. When it announced a 25 basis point cut in August, it said inflation was at 3.3 percent.
This is the second consecutive meeting in which the RBNZ has cut the official cash rate. It announced a 25 basis point reduction in August after leaving it at 5.5 percent since May last year. It was last set at 4.75 percent in February of 2023.
The Bank admitted the sluggish economy was due “in part” to its restrictive monetary policy.
“Business investment and consumer spending have been weak, and employment conditions continue to soften. Low productivity growth is also constraining activity,” it noted.
Benefits of Cut Will Take Time
New Zealand’s banks responded quickly, announcing immediate reductions in their floating mortgage rates. Most did so by the full 50 points.
However, the benefits may take some time to flow through the economy. The Reserve Bank’s figures show that the share of existing loans that currently have fixed mortgage rates—due to change within the next 12 months—is around 66 percent, meaning two-thirds of borrowers won’t see the change immediately.
Kelvin Davidson, chief economist at property research firm CoreLogic, said the RBNZ statement conveyed a sense of urgency.
Economic Growth Lukewarm
Indeed, the statement accompanying the announcement paints a bleak picture of New Zealand’s economy.“Economic growth is weak, in part because of low productivity growth, but mostly due to weak consumer spending and business investment. High-frequency indicators point to continued subdued growth in the near term,” it says.
The bank predicts that employment and advertised vacancies will continue to fall, house price growth will be weak, net immigration will be lower, and “ongoing fiscal consolidation from spending restraint ” will dampen demand growth.
Minister, Retail Group Welcomes Decision
Finance Minister Nicola Willis said the official cash rate decision was “fantastic news,” calling it a “double whammy, double happy,” in reference to earlier speculation that the Bank may take a more cautious approach and cut only 25 basis points.
Willis said the 50-point reduction was a sign that inflation was coming under control, which was what was needed to take control of the cost-of-living crisis.
Retail NZ called the announcement “welcome news for retailers as they prepare to enter the period that is traditionally the busiest time of year for retail sales. Strong pre-Christmas sales are critical to retailers meeting their annual sales targets.”Future Cuts Likely: Economists
Some economists are predicting another 50 basis point cut at the Reserve Bank’s final meeting later this year—particularly given that it won’t be reviewed again until February 2025, and that the rate is still well above neutral settings—but others are urging caution, pointing to the number of variables in play.The RBNZ’s decision is similar to that of many central banks globally, as they attempt to lessen the effects of aggressive rate rises aimed at taming inflation. The U.S. Federal Reserve slashed rates by 50 basis points at its last meeting in September.
Australia remains one of the few countries going against the trend, with its Reserve Bank arguing that restrictive conditions must remain in place to ensure inflation is conquered.
