The Reserve Bank of New Zealand has unexpectedly cut the official cash rate (OCR) by 0.25% to 5.25%.
The move was not expected by economists, who tipped rate cuts later in the year.
As shown below by Justin Fabo at Antipodean Macro, the latest Monetary Policy Statement (MPS) from the Reserve Bank predicts that the OCR will be reduced at least once more this year, and most likely twice.
More reductions are planned through 2025, with the OCR expected to conclude next year well below 4%.
In addition, the Reserve Bank has substantially reduced its inflation estimates. It now anticipates inflation to return to its target range in the current quarter, with annual inflation to reach 2.3% by the end of Q3.
The Monetary Policy Committee noted that “the pace of further easing will depend on the Committee’s confidence that pricing behaviour remain consistent with a low inflation environment, and that inflation expectations are anchored around the 2% target”.
The MPS forecasts have revised New Zealand’s GDP lower and increased the expected unemployment rate.
The Reserve Bank’s decision to cut rates reflects the pragmatic realisation that the economy has weakened far more than expected and that monetary conditions are too tight.
Indeed, the following chart from Justin Fabo shows that New Zealand’s OCR remains well above “neutral”, suggesting a series of rate cuts to come.
