Reserve Bank of New Zealand Cuts Interest by Half a Percent

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.

“The Committee agreed that it is appropriate to cut the OCR 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,” the Monetary Policy Committee (MPC) said.

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.

“There’s a sense in the Reserve Bank’s commentary that they feel a need to act fairly quickly to get monetary policy back towards a more neutral setting, or even stimulatory, rather than the restrictive territory it’s been in for quite some time now,” he said.

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.

Retailers will be hoping it will reverse the trend in consumer confidence, which has been at prolonged low levels over the last two years.

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.