A major shift in stance! Recession looming + inflation easing, Reserve Bank of New Zealand unexpectedly cuts interest rates by 25 basis points

According to the Wisdom Financial APP, the Reserve Bank of New Zealand unexpectedly cut interest rates by 25 basis points on Wednesday, lowering the Official Cash Rate (OCR) from 5.5% to 5.25%, marking the first rate cut since March 2020. Due to economic downturn and slowing inflation, the Reserve Bank of New Zealand has entered a loosening cycle much earlier than previously expected, causing the local currency to plummet.

The latest forecast from the Reserve Bank of New Zealand shows that the average OCR for the fourth quarter will drop to 4.92% and will further decrease to 4.36% by mid-next year.

The Reserve Bank of New Zealand stated, "New Zealand's annual consumer price inflation is returning to the Monetary Policy Committee's target range of 1-3%. Further easing will depend on the Committee's confidence in pricing behavior remaining consistent with the low inflation environment and whether inflation expectations stabilize around the 2% target."

This rate cut indicates a rapid shift in the stance of the Reserve Bank of New Zealand. The bank had previously considered raising rates in May this year and had stated that it would not cut rates before the second half of 2025. With the New Zealand economy on the brink of its third recession in less than two years and rising unemployment rates, the Reserve Bank of New Zealand's concerns about persistently high domestic inflation are easing.

As the economic downturn approaches, the Reserve Bank of New Zealand lowers the Official Cash Rate

Reserve Bank of New Zealand Governor Adrian Orr stated at a press conference that the Committee had considered a 50 basis point rate cut but decided on a 25 basis point cut as it was a reasonable low-risk start.

Following Orr's remarks, the New Zealand dollar continued to decline, falling by 1.1% to 60.11 US cents at one point.

Nick Tuffley, Chief Economist at ASB Bank, said, "We expect the Reserve Bank of New Zealand to continue steadily cutting rates by 25 basis points, with the next cut likely in October. If inflation pressures ease faster than expected, the Reserve Bank of New Zealand may need to accelerate its return to a more neutral policy."

Approaching a new round of recession

In its assessment in July, the Reserve Bank of New Zealand stated that the tightening policy's impact on demand may be stronger than expected. Now, the Reserve Bank of New Zealand predicts economic contraction in the second and third quarters of this year, marking the country's third recession since the end of 2022.

The Reserve Bank of New Zealand stated, "The Committee noted that the softening in domestic economic activity observed in the July Monetary Policy Statement has become more pronounced and widespread." "As a range of indicators show economic contraction at a faster pace than expected, the downside risks to output and employment highlighted in July have become more pronounced."

Since U.S. employment data suggested recession risks in the world's largest economy, investors have increased bets on central bank rate cuts. The market expects the Federal Reserve to begin cutting rates next month, while the central banks of Canada, the UK, and Europe have already started easing cycles.

In contrast, the Reserve Bank of Australia maintained its interest rate last week. Reserve Bank of Australia Governor Michele Bullock even stated that if needed to contain inflation, they would not hesitate to raise rates New Zealand's inflation rate slowed to 3.3% in the second quarter, close to the Reserve Bank of New Zealand's target range of 1-3%.

The Reserve Bank of New Zealand now predicts that the inflation rate will drop to 2.3% this quarter, but it will not return to the midpoint of the 2% range until mid-2026.

The Reserve Bank of New Zealand stated: "Recent indicators suggest that inflation will sustainably return to target levels within a reasonable time frame." "However, committee members noted that monetary policy will need to remain restrictive for a period to ensure domestic inflation pressures continue to dissipate."