RBNZ Surprised With A 25bps Rate Cut As A “Reasonable First Step” Amidst Cooler Inflation And Slower Growth


The New Zealand dollar dropped sharply earlier today and, no, it’s not because your trading platform suffered a “massive DDoS attack.

A few hours earlier, the Reserve Bank of New Zealand (RBNZ) surprised the markets by cutting its Official Cash Rate by 25 bps to 5.25% when a lot of market players expected it to remain at 5.50%.

In its statement, the Committee cited increased confidence that inflation will decline to its 2% target as one of the reasons for the rate cut. That is, inflation expectations, business pricing behavior, and “a variety of core inflation measures” are now more consistent with low and stable inflation.

RBNZ members were also concerned that weaknesses in domestic economic activity “have become more pronounced and broad-based.”

In particular, factors such as restrictive monetary policy, the larger impact of tighter fiscal policy, falling net migration, and measurement uncertainties may have contributed to markers for business activity, electronic card transactions, vehicle traffic, house sales, and filled jobs and job vacancies all signaling weaknesses in recent months.

While the RBNZ is confident that “monetary policy restraint can now begin to ease,” the pace of its easing will depend on inflation expectations and pricing behavior being consistent with its 2% inflation target.

Link to RBNZ’s August policy decision

The highlights of the central bank’s August 2024 projections further supported its dovish biases:

  • The economy may see a technical recession with negative growths seen in Q2 2024 and Q3 2024
  • Annual inflation could hit 2.3% by the end of 2024 and drop to the 2.0% target by Q2 2026
  • The unemployment rate is expected to climb further and peak at 5.4% in Q1 2025 before easing back down
  • RBNZ will continue to reduce its Official Cash Rate, easing to 4.9% by year-end and falling to 3.0% by 2027

Link to RBNZ’s August 2024 economic outlook

In his presser, RBNZ Governor Adrian Orr repeated the Committee’s confidence that inflation is headed toward their target levels. He shared that they considered a “range of moves” including a 50bps rate cut but ultimately reached a consensus in cutting rates by 25 basis points.

The RBNZ head honcho believes that a 25bps rate cut is a “reasonable first step” and that the central bank is in a “strong position” to move calmly with its monetary easing.

Link to RBNZ’s press conference

New Zealand Dollar vs. Major Currencies: 5-min

Overlay of NZD vs. Major Currencies

Overlay of NZD vs. Major Currencies Chart by TradingView

The New Zealand dollar, which had seen strength ahead of the RBNZ’s decision, traded in tight ranges right before the report and traded sharply lower when the decision was published.

Kiwi took a chill pill from its losses for a while but also saw fresh bearish pressure when Gov. Orr’s press conference hinted at further easing down the road.

NZD is trading in the red across the board, with the most losses seen against JPY, USD, and CHF while seeing slightly more limited losses against AUD, CAD, and GBP.