The Reserve Bank has cut the Official Cash Rate by 50 basis points to 2.5%.
The bank delivered its latest Monetary Policy Review at 2pm today.
The Monetary Policy Committee reached a consensus to reduce the Official Cash Rate (OCR) by 50 basis points (bps).
The committee said it remained open to further reductions in the OCR as required for inflation to settle sustainably near the 2% target mid-point in the medium term.
“It’s taking a lot of work to get this economy turning around and today’s decision will hopefully be the shock treatment required to get everyone back into gear,” said Kelvin Davidson, economist for property sector analyst Cotality.
ASB chief economist Nick Tuffley said the decision signalled that the likelihood of inflation pressures being weaker than previously anticipated carried more weight than waiting to see how quickly the economy rebounds and what ripple effects come from the current spike in inflation.
“Our view is the downsides from the 50 basis point cut are small, given the RBNZ’s August forecasts showed a strong likelihood the OCR would get there by year end anyway,” he said.
“We expect one further 25 basis point cut will help underwrite economic recovery sufficiently.
“But if it doesn’t, the RBNZ could potentially cut even further,” ASB said.
The sharemarket gained ground on the back of the rate cut to within striking distance of a record high.
By late afternoon, the S&P/NZX50 Index was up 90 points or 0.67% at 13,621 - not far off its all time intraday high of 13,643.78, set on January 8, 2021.
“Yes, it’s due to the RBNZ announcement,” Mark Lister, investment director at Craigs Investment Partners, said.
“Most of the market is up and the types of sectors that are performing well are ones that either have high yields that provide a good income stream, or stocks that are leveraged to the housing market or other parts of the economy that might be stronger beneficiaries,” he said.
In the interest rate markets, two year swap rates fell to 2.56% from 2.63% just before the release.
The Monetary Policy Committee warned that annual consumers price index inflation was currently around the top of the Monetary Policy Committee’s 1-3% target band.
“However, with spare capacity in the economy, inflation is expected to return to around the 2% target mid-point over the first half of 2026,” it said.
Annual inflation is currently at 2.7%, but food and power prices have been rising faster than that.
There were “upside and downside risks” to the inflation outlook in New Zealand, the committee said.
“Cautious behaviour by households and businesses could slow the economic recovery, reducing medium-term inflation pressure.
“Alternatively, higher near-term inflation could prove to be more persistent,” it added.
The committee revised its assessment of spare capacity in the economy following the worse than expected second-quarter GDP results, but only marginally.
An unusually large seasonal balancing item had contributed to the weakness in the headline figure and was likely to be reversed out in the third quarter, it said.
“More timely indicators suggest that economic activity recovered modestly in the September quarter, but there remains significant spare capacity in the New Zealand economy,” the committee said.
Domestic inflationary pressures had continued to moderate as projected, giving the committee more confidence that inflationary pressures were contained.
“Some members continue to put relatively more weight on the risk that excess precaution by households and businesses and, therefore, subdued economic activity and employment persists,” the committee said.
“A larger reduction in the OCR could mitigate this risk by providing a clear signal that supports consumption and investment.”
In response to the OCR cut, the New Zealand dollar dropped by about half a US cent to US57.50c from US58.00c just before the release.
Finance Minister Nicola Willis said the cut would further ease pressure on households and businesses.
“The reduction will be welcome news to mortgage-holders and businesses, as OCR drops flow through to interest rates.
“Falling interest rates are good news for growth, jobs, and investment.”
But Labour’s finance and economy spokesperson Barbara Edmonds said the Reserve Bank’s decision to cut interest rates was a direct response to the economic damage caused by Christopher Luxon’s mismanagement.
“Today’s OCR cut is good news for mortgage holders - but it’s also the Reserve Bank fixing the damage Christopher Luxon has done.
“New Zealand’s economy is in crisis – and it’s Christopher Luxon’s fault. Businesses are closing in record numbers, jobs are being lost, and more Kiwis are leaving to find work overseas because he has no plan for growth."
ANZ market strategist David Croy saw the 50 basis point cut as a neutral move from the Reserve Bank.
“I’d call this a pretty neutral 50 basis point cut,” he said.
“They have said they are open to further easing but have not explicitly signalled further easing,” Croy said.
Retail NZ chief executive Carolyn Young said the OCR cut would be welcomed by the retail sector.
“Today’s cut to 2.5% will help put more cash into consumers’ pockets and we hope it will give them the confidence to enjoy some discretionary spending,” Young said.
“We hope today’s OCR cut will continue to support a recovery in retail demand. This will help give retailers confidence to buy stock and retain staff in the run up to the end of the year.”
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.
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