In its latest meeting in February, the Reserve Bank of New Zealand (RBNZ) slashed its Official Cash Rate (OCR) by another 50 basis points, bringing it down to 3.75%. This move was largely anticipated and marks the third significant rate cut in a row as inflation remains under control and the economy shows sluggish growth.
Key Highlights:
- The RBNZ trimmed the OCR by 50 basis points to 3.75%, continuing its easing trend.
- Annual consumer price inflation is at 2.2%, comfortably near the midpoint of the 1-3% target range.
- Economic activity is still weak, with notable spare capacity.
- The bank hints at further rate reductions possible through 2025.
- The decision is influenced by rising concerns over uncertainties in global trade.
The central bank also indicated that there’s room for more easing up to 2025, depending on how conditions unfold. They highlighted that even though inflation sits within their target range, New Zealand’s economic activity is still underwhelming. Price and wage-setting are starting to adjust to this low-inflation landscape.
You can find further information in the official RBNZ Monetary Policy Statement for February 2025.
Adding to the central bank’s reasoning is the recent climb in the unemployment rate, which hit 5.1% in Q4 2024, coupled with broader signs of a softening labor market. These factors seem to boost the RBNZ’s confidence in sticking with its aggressive easing blueprint.
Looking forward, the RBNZ anticipates a bounce back in economic growth in 2025, powered by reduced interest rates and a lift in export income thanks to stronger commodity prices and a weaker currency. Nonetheless, the bank underscored looming uncertainties, particularly concerning global trade policies and how they might affect domestic inflation.
During a press briefing, RBNZ Governor Adrian Orr outlined a plan for another 50 basis points cut in the OCR by mid-2025. This would likely happen in two steps of 25 basis points each, around April and May. He stressed the importance of a measured stride ahead while also noting that this projection hinges on economic activity and new data.
Market Response
As the RBNZ decision approached, the New Zealand dollar had been steady but took an initial dip across the board following the announcement of the half-percent cut.
Yet, just before the press conference, the Kiwi showed resilience, recovering from its initial plunge. Governor Orr’s hint at more gradual rate adjustments in future meetings sparked further rallies.
The New Zealand dollar made marked progress against major currencies, particularly shining against the pound (+0.38%), the Swiss franc (+0.31%), and the US dollar (+0.22%). Traders appear to have already factored in the dovish outlook and capitalized on the event to lock in gains.
