RBNZ cuts interest rates by 25 bps citing inflation progress, weak growth

Investing.com-- The Reserve Bank of New Zealand unexpectedly cut interest rates on Wednesday, citing recent progress towards meeting its annual inflation target and as local economic growth remained weak. 

The RBNZ cut its official cash rate to 5.25% from 5.5%, ducking expectations that it would keep the rate steady for a ninth consecutive meeting. But some analysts were pricing in a potential cut, after the central bank struck a somewhat dovish tone at its previous meeting in May. 

The RBNZ flagged progress in bringing consumer price inflation back within its 1% to 3% target- a message it reiterated on Wednesday. Inflation is expected to fall within the bank’s target band in the September quarter, the RBNZ said. 

But the bank noted that economic growth in the country remained sluggish, especially amid weak export demand in top market China. The RBNZ also flagged the potential for higher import prices to push up inflation. 

The central bank noted that market expectations were for a 100 basis point cut in rates by mid-2025. But the bank reiterated that any further changes in rates will be largely driven by upcoming economic readings.

Wednesday’s cut saw the RBNZ joining several of its global peers in reducing interest rates as a post-COVID bump in inflation faded. The central bank was the first among its peers to hike rates after the pandemic, raising them in mid-2021.

But the RBNZ’s efforts to reduce inflation were stymied by a string of adverse weather conditions in early-2023, which caused a temporary rise in inflation.

The New Zealand dollar weakened sharply after Wednesday’s cut, with the NZDUSD pair sinking nearly 0.7%.