New Zealand’s central bank cut its Official Cash Rate (OCR) by 50 basis points to 2.5%, moving faster than most forecasters had expected.
The Reserve Bank of New Zealand (RBNZ) said the larger-than-usual cut was needed to prevent prolonged economic weakness, signalling that further easing could follow before year-end.
The decision, announced in Wellington, caught markets off guard. Out of 25 economists surveyed by Bloomberg, only 10 had expected a half-point cut, while most predicted a smaller 25-point move.
The surprise shift pushed the New Zealand dollar down to a six-month low against the US dollar, as investors priced in additional policy easing.
Weak growth prompts faster monetary easing
The RBNZ’s Monetary Policy Committee said that economic activity through mid-2025 had been weaker than anticipated, leading to its decision to deliver a more aggressive cut.
The bank stated that it remains open to “further reductions” in the OCR if conditions do not improve.
New Zealand’s economy contracted by 0.9% in the second quarter — triple the decline initially projected by the central bank — marking another setback after last year’s deep recession.
With business confidence faltering and household spending subdued, the central bank sees little near-term momentum.
Unemployment has climbed to a five-year high of 5.2%, and the housing market continues to stagnate despite previous rate reductions.
The RBNZ hopes the latest move will help stimulate growth and return inflation to its 2% midpoint target by 2026.
Market reaction and investor sentiment
Financial markets quickly adjusted to the RBNZ’s dovish shift. The New Zealand dollar fell 1% to 57.47 US cents in afternoon trading, while yields on two-year government bonds dropped eight basis points to 2.63%.
The S&P/NZX 50 index gained as investors bet on cheaper borrowing costs supporting equities.
Swaps data now show traders expecting another 25-basis-point cut at the RBNZ’s November meeting, with a chance of further easing in early 2026.
The Kiwi has been the weakest performer among the Group-of-10 currencies over the past year, losing more than 6% against the US dollar.
It also hit a new three-year low against the Australian dollar, reflecting diverging policy paths between the RBNZ and the Reserve Bank of Australia, which has trimmed rates by only 75 basis points during the same period.
Domestic pressures weigh on recovery hopes
The RBNZ described its latest decision as an “interim rate review,” meaning no updated forecasts or press conference accompanied the move.
However, the statement highlighted persistent spare capacity in the economy and cautious behaviour by businesses and households.
Recent surveys suggest that firms expect little improvement in trading conditions or hiring over the next six months, heightening the risk of another recession.
The New Zealand Institute of Economic Research warned that overall activity could remain flat in the third quarter.
Inflation, which stood at 2.7% in the second quarter, is forecast to rise to 3% before slowing next year.
The central bank acknowledged both upward and downward risks to its inflation path, citing that weaker consumer spending could curb medium-term pressures, while stubborn near-term price gains could delay its disinflation goal.
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