On May 28th, the Reserve Bank of New Zealand (RBNZ) announced a 25 basis point cut to the official cash rate (OCR), bringing it down to 3.25%. This marks the sixth consecutive rate cut since August 2024, in line with market expectations. The decision was passed by a 5-1 vote, with one committee member opting to maintain the rate at 3.5%.
Exchange Rate Reaction
Following the announcement, the New Zealand dollar (NZD) experienced a sharp rise against the US dollar (USD), turning from a decline to an increase. The NZD/USD pair traded at 0.5945, down 0.12% on the day. The market was somewhat caught off guard by the non-unanimous decision, leading to a brief spike in two-year interest rate swaps.
Rationale Behind the Rate Cut
The RBNZ cited several factors for the rate cut:
Inflation within Target Range: Inflation remains within the 1%-3% target band, currently at 2.5%. The bank expects it to rise to 2.7% in the third quarter of 2025 before returning to near the 2% midpoint.
Economic Uncertainty: The bank highlighted significant uncertainty surrounding US tariffs and global economic policies, which could impact New Zealand’s exports and domestic growth.
Spare Capacity in the Economy: Policymakers noted considerable spare capacity in the economy, with core inflation and wage inflation continuing to weaken.
Future Policy Outlook
The RBNZ indicated that future policy decisions will depend on the medium-term inflation outlook. The bank forecasted a slightly deeper easing cycle than previously projected, with the OCR expected to be at 2.92% in Q4 2025 and 2.85% in Q1 2026. Acting Governor Christian Hawkesby emphasized that the next steps would depend on developments and their impact on medium-term inflation pressures.
Market Expectations and Analyst Views
Further Rate Cuts Expected: Analysts, including Kelly Eckhold from Westpac Bank, expect another 25 basis point cut to 3% at the August meeting, previously anticipated for July.
Data-Dependent Mode: Given the ongoing uncertainty surrounding US tariffs, the RBNZ may shift to a more data-dependent approach.
Economic Forecasts: The RBNZ expects GDP to grow by 0.4% quarter-on-quarter in Q1 2025. However, the bank warned that global policy uncertainties could weigh on business investment and consumption.
Conclusion
The RBNZ’s decision to cut interest rates reflects its efforts to stimulate economic recovery amid global uncertainties. While inflation remains within the target range, the bank is prepared to respond to domestic and international developments to maintain price stability. The market anticipates further rate cuts, though the exact timing remains uncertain. The NZD’s reaction to the rate cut underscores the ongoing volatility in financial markets due to global economic policies.
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