New Zealand cuts rates by 50 bps, flags further easing

By Lucy Craymer

WELLINGTON (Reuters) - New Zealand's central bank cut rates for a third time in four months on Wednesday and flagged further substantial easing to come, though not quite as quickly as some optimists in the market had been betting on.

The Reserve Bank of New Zealand lowered the cash rate by half a percentage point to 4.25%, as expected by 27 of the 30 economists in a Reuters poll.

"The committee agreed that a 50 basis point cut is consistent with their mandate of maintaining low and stable inflation, while seeking to avoid unnecessary instability in output, employment, interest rates and the exchange rate," the minutes of the RBNZ meeting said.

While the decision met analyst expectations it disappointed the market, which had been pricing a nearly 40% chance of a 75 basis point cut ahead of the meeting.

As a result, the New Zealand dollar rose to US$0.5873 from US$0.5829 ahead of the statement and the two year swap rate increased to 3.6550% from 3.5900%.

While the decision wrong-footed some in the market, analysts said the policy statement was fairly dovish.

"The RBNZ has left the doors wide open for its future moves, with no attempts to temper market expectations for the pace of future cuts," ASB chief economist Nick Tuffley said.

He added the further pace of cuts will be dictated by events.

"It is also now a three-month gap until the RBNZ next meets, with a full cycle of quarterly domestic data and President Trump's inauguration in between," he said.

The RBNZ is now forecasting the cash rate to be at 3.8% in the second quarter of 2025 and at 3.6% in the fourth quarter of 2025, suggesting more cuts than had been expected in August.

Three major retail banks, BNZ, ASB Bank and Kiwibank cut their interests following the announcement.

Inflation slowed to 2.2% in the third quarter and the statement said domestic price and wage setting behaviour is becoming consistent with inflation remaining near the RBNZ's midpoint target of 2%.

It added economic growth is expected to recover during 2025, as lower interest rates encourage investment and other spending. Employment growth is expected to remain weak until mid-2025 and, for some, financial stress will take time to ease.

New Zealand is one of several central banks around the globe that have started cutting rates as inflation has moved lower. Australia, however, is an exception to the easing trend with cuts not expected until the first half of next year.

(Reporting by Lucy Craymer; Editing by Sam Holmes)