Comes after mixed market forecasts
The Reserve Bank of New Zealand (RBNZ) has made a decisive move by cutting the Official Cash Rate (OCR) by 25 basis points to 5.25% in its much-anticipated August meeting.
This rate cut marks a significant moment in New Zealand’s economic landscape, as it is the first adjustment in months following a period of downward-trending inflation.
The Committee noted that the weakening in domestic economic activity observed in the July Monetary Policy Review has become more pronounced and broad-based.
“Headline inflation has declined, and business inflation expectations have returned to around 2% at medium- and longer-term horizons,” the board said.
Committee members agreed that monetary policy restraint can now begin to ease.
“The pace of loosening will depend on the extent to which price-setting behaviour continues to adapt to lower inflation and inflation expectations remain well anchored to the target mid-point.”
The decision reflects the RBNZ’s effort to support the economy amidst growing signs of a slowdown, particularly in the labour market.
Jenny Campbell, Country Manager of mortgage aggregator Finsure, reacted positively to the news.
“A reduction in the OCR is a welcome relief, particularly as forecasters weren’t expecting anything to happen until later this year,” Campbell said.
Pre-decision sentiment among industry leaders
Before the RBNZ’s decision, there was a mix of expectations among economists and financial institutions.
The markets had made their mind up weeks before, pricing in significant cuts, with -19bp of cuts expected on Wednesday alone.
“We know inflation is cooling, and is down from 7.3% to 3.3%,” Kiwibank economists Sabrina Delgado, Mary Jo Vergara, and Jarrod Kerr had said on Tuesday, further forecasting reductions below 3% by the September quarter.
However, the labour market is softening, with unemployment rising to 4.6%.
“Looking at current market pricing, anything less than cutting in August will cause a large spike in wholesale rates.”
ASB also tipped the rate drop, with chief economist Nick Tuffley saying the cuts will likely continue in subsequent meetings.
“The data since the July review have not been a smoking gun but do emphasise that economic activity is coming off the boil more quickly,” Tuffley said, adding that this points to the need for an orderly easing cycle.
Westpac also described the labour market data as “no smoking gun” for a rate hike and was more conservative with its forecast.
However, the major bank did recently bring forward its forecast and acknowledged the potential for “significant rate cuts” in the next year.
It was a similar story with ANZ, which also stuck with its November forecast.
However, ANZ chief economist Sharon Zollner didn’t rule out the cut given the “risks have clearly tilted towards more economic weakness than is necessary to beat inflation”.
Bank of New Zealand’s Stephen Toplis was more bullish on his prediction, placing a 35% probability on a 25-basis-point cut and the same for a 50-basis-point cut, reflecting the uncertainty in the economic outlook.
“The economy is in distress,” Toplis said on Tuesday.
“The labour market is softening rapidly and will soften much more. Inflation is settling within the RBNZ’s target band. This demands an immediate response from the central bank to prevent an overshoot on the downside.”
What’s Next? Potential rate adjustments from lenders
Following the RBNZ’s rate cut, the focus now shifts to how lenders will respond.
The reduction in the OCR is likely to prompt many banks and financial institutions to lower their interest rates, providing much-needed relief to borrowers.
Jenny Campbell emphasised the need for lenders to act swiftly
“It’s now up to the lenders to ensure that reduction is passed on as soon as possible to help alleviate the pain many borrowers have been feeling.”
Campbell also called on advisers to proactively engage with their clients, particularly those currently locked into higher rates, to explore refinancing options that could offer immediate financial benefits.
As the economic landscape continues to evolve, all eyes will be on the lending market to see how quickly these rate cuts are passed through to consumers and what impact this will have on the broader economy.
The RBNZ’s decision today is a clear signal that it is ready to act to prevent further economic deterioration, but the coming months will be crucial in determining the success of this strategy.
