Interest Rates Drop in New Zealand as Central Bank Prepares for Recession
The Reserve Bank of New Zealand has surprised everyone by lowering the official cash rate, leading to banks lowering their loan rates.
New Zealand’s central bank has reduced its official cash rate (OCR) by 25 basis points, from 5.5 to 5.25 percent, causing astonishment among market participants and economists. This decision is a significant reversal from its stance just a month ago.
For over a year, the Reserve Bank of New Zealand (RBNZ) had maintained the 5.5 percent rate through several reviews. In its most recent forecast in May, the RBNZ indicated a 60 percent likelihood of an OCR increase (to 5.75 percent), while ruling out any cuts until the second half of 2025.
However, with deteriorating economic conditions and the looming threat of another recession, the Monetary Policy Committee has had a change of heart.
Expressing concerns about the economy contracting faster than expected, the committee emphasized the need to avoid unnecessary instability in output and employment.
Initially projecting that inflation would not reach the target range of 1–3 percent until early 2025, the RBNZ now forecasts a 2.3 percent inflation rate by the end of September.
Following this development, ANZ and ASB were the first banks to announce reductions in interest rates, passing on the full 0.25 percent cut, with more banks likely to follow suit.
Impending Recession
While the OCR cut benefits mortgage holders, the underlying reasons behind it are concerning. RBNZ Governor Adrian Orr described the current state of the economy as “the darkest period.”
The RBNZ anticipates another recession, with GDP expected to shrink by 0.5 percent in the June quarter and an additional 0.2 percent decline in the following quarter, potentially marking negative growth in six out of nine quarters.
Furthermore, the RBNZ projects minimal house price growth for the year and increased unemployment, estimating a peak rate of 5.4 percent in March next year.
The only positive aspect in the latest Monetary Policy Statement is the likelihood of further OCR cuts by the end of 2024, with economists predicting rates to drop to 5 percent by year-end and potentially to 4.5 percent by June next year.
When questioned about the unexpected shift in strategy, Orr emphasized the importance of understanding the conditional nature of economic forecasts and advised reporters to effectively communicate the reasoning behind the OCR cut.
Reacting positively to the decision, Chief Economist at Betashares, David Bassanese, recognized the RBNZ’s shift as a measure to support the economy amid a challenging environment.
Additionally, politicians such as Prime Minister Christopher Luxon and Finance Minister Nicola Willis credited the OCR reduction for addressing inflation and paving the way for lower interest rates, signaling a potential path towards economic recovery.
