Policymakers signal likely end to easing cycle as economy shows early signs of picking up
[AUCKLAND] New Zealand’s central bank cut its benchmark official cash rate (OCR) by 25 basis points to 2.25 per cent on Wednesday (Nov 26), its lowest level since mid-2022, but policymakers signalled the likely end to the easing cycle as the economy showed early signs of picking up.
The New Zealand dollar jumped as traders sharply trimmed expectations for any further rate cuts, with the central bank saying the board had debated between holding rates and delivering another cut.
“Future moves in the OCR will depend on how the outlook for medium-term inflation and the economy evolve,” the Reserve Bank of New Zealand (RBNZ) said in its accompanying monetary policy statement – the last of the year and the final meeting under governor Christian Hawkesby before Swedish economist Anna Breman takes over in December.
The RBNZ is now forecasting the cash rate will be at 2.20 per cent in the first quarter of 2026 and 2.65 per cent in the fourth quarter of 2027. This is lower than had been expected in August, but the path suggests a hawkish tilt as the door to further easing has been virtually shut.
The New Zealand dollar rallied 0.7 per cent to US$0.5661, the highest in over a week, while two-year interest rate swaps rose 4 basis points to 2.6251 per cent as the market sharply scaled back chances of further rate cuts.
The decision matched a Reuters poll in which all but four of the 36 economists surveyed forecast the RBNZ would cut the cash rate by a quarter point.
The central bank, which surprised markets by slashing rates by a bigger-than-expected 50 basis points in October, has delivered 325 basis points worth of easing since August 2024 to shore up an economy that has contracted in three of the last five quarters.
The statement said risks to the inflation outlook are balanced and noted that while economic activity was weak over mid-2025, it is picking up as lower interest rates are encouraging household spending.
Hurdles to further rate cuts
Nick Tuffley, chief economist at ASB Bank, said the door to further easing is “not as wide as many would have expected.”
“The RBNZ was a bit more cautious than generally expected,” he said, adding that a further cut can only be expected if the economy underperforms.
The New Zealand central bank’s guarded approach aligns with the Reserve Bank of Australia, which held policy steady this month after three rate cuts this year, saying it was cautious about easing further given higher inflation.
The RBNZ minutes of the meeting said the committee had considered holding the cash rate unchanged at 2.50 per cent or cutting by 25 basis points, with five of the six members voting to cut the cash rate.
A global front-runner in withdrawing pandemic-era stimulus, the RBNZ lifted rates 525 basis points between October 2021 and September 2023 to curb inflation in the most aggressive tightening since the official cash rate was introduced in 1999.
Some economists, though, and critics blame the central bank’s rapid-fire tightening and a delay in embarking on rate cuts for the prolonged economic gloom. The South Pacific island’s economy slipped into recession last year, and it contracted again sharply in the second quarter of this year, prompting the outsized October rate cut.
Growth remains weak despite the steady monetary stimulus, undermined by low confidence and a housing market in the doldrums following a sharp downturn in the wake of the earlier rate hikes.
A slowdown in the global economy, rising unemployment and the government’s tight fiscal stance have all added to New Zealand’s woes.
The central bank is expecting the economy to have grown 0.4 per cent in the third quarter and expand 0.7 per cent in the fourth quarter.
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