New Zealand Central Bank to slow its policy rate descent

Summary

• In a widely expected decision this week, the Reserve Bank of New Zealand (RBNZ) lowered its Official Cash Rate by 25 bps to 3.25%. This marks 225 bps of cumulative easing during the current cycle. While the accompanying statement and updated economic projections suggested that further monetary easing remains likely, they were also notable in that they signaled the central bank's monetary easing cycle could be nearing its end.

• We see inflation pressures waning in the coming months, owing in part to a softening labor market that has led to an easing in the pace of wage growth. At the same time, there are also indications--from business confidence measures and activity indicators--that the New Zealand economy has started to stabilize after a very weak period of economic growth.

• In our view, this combination of softer price and wage growth pressures and stabilizing economic growth is consistent with further but cautious RBNZ easing through the end of 2025. To that point, we see the central bank transitioning to a once-per-quarter rate cut pace. We look for two more 25 bps rate cuts from the central bank this year, in August and November, which would see the policy rate reach a low of 2.75%.

Reserve Bank of New Zealand delivers once again

In a widely expected decision, the Reserve Bank of New Zealand (RBNZ) lowered its Official Cash Rate by 25 bps to 3.25%. That is the sixth straight meeting the RBNZ has lowered its policy rate, and brings the cumulative easing during the current cycle to 225 bps. While the accompanying statement and updated economic projections suggested that further monetary easing remains likely, they were also notable in that they signaled the central bank's monetary easing cycle could be nearing its end.

Among the key elements of the RBNZ's announcement, the central bank said:

• Core inflation is declining and there is spare productive capacity in the economy. These conditions are consistent with inflation returning to the mid-point of the 1 to 3 percent target band over the medium term.

• The economy is recovering after a period of contraction. High commodity prices and lower interest rates are supporting overall economic activity.

• Recent developments in the international economy are expected to reduce global economic growth.

• Inflation is within the target band, and the Committee is well placed to respond to domestic and international developments to maintain price stability over the medium term.

The RBNZ's updated economic projections still pointed to an overall easing bias. The Official Cash Rate is projected to decline to 2.9% by Q4-2025, implying at least one, and perhaps two, more 25 bps rate cuts over the rest of this year. That moderate further easing reflects the RBNZ's forecast that CPI inflation will edge slightly higher in the near term, reaching 2.7% year-over-year in Q3-2025, before settling back close to the 2% target over the medium term. Q1 GDP is forecast to rise 0.4% quarter-over-quarter, and grow modestly in Q2 and Q3, before the pace of growth picks up from late 2025.

Of note, there were also indirect indications from RBNZ policymakers the central bank's easing cycle might be nearing its end. RBNZ Governor Hawkesby said “we have done a lot of work” and that “we're in a good position such that we can respond to developments as they occur.” In addition, when asked whether the policy rate was approaching a neutral level, chief economist Conway said “we are definitely into that zone.” Overall, we believe this week's announcement suggests the RBNZ policymakers will give even more careful consideration as it decides whether, and when, to lower interest rates at upcoming monetary policy meetings.

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