New Zealand’s sinking economy has pushed the central bank to make a second consecutive 50 basis point interest rate cut.
And Reserve Bank of New Zealand (RBNZ) Governor Adrian Orr isn’t done, saying economic conditions are so bad he will cut again early next year.
The RBNZ believes New Zealand is in the midst of another technical recession.
The economy contracted 0.2 per cent in the June quarter, and the RBNZ forecasts a further 0.2 per cent contraction in the September quarter to be recorded when figures are released next month.
Economic pessimism prompted Wednesday’s cut from 4.75 percent to 4.25 percent.
“Economic activity in New Zealand remains weak and production remains below potential,” Mr Orr said.
“If economic conditions continue to evolve as projected, the (RBNZ) expects to be able to further reduce the OCR early next year.”
Economists widely expected the 50 basis point drop, and some believed it could have been reduced by as much as 75 basis points.
The Reserve Bank of New Zealand (pictured) has cut the country’s cash rate by 50 basis points to 4.25 per cent, below Australia’s for the first time in four years.
ABS chief economist Nick Tuffley said new tracking showed the OCR would fall below four per cent in the first half of next year.
“We now expect the RBNZ to slow the pace of easing to 25 basis points in 2025, but the risk is a further 50 basis point cut,” he said.
New Zealand has been on an economic rollercoaster during the pandemic.
First, it got top marks for eliminating COVID-19 and avoiding an initial shock.
However, supply chain shocks and the combination of government-driven revenues and low interest rates pushed inflation to a staggering peak of 7.3 percent in 2021.
To control inflation, the RBNZ raised the OCR to 5.5 per cent and kept it there for more than a year before beginning its cutting cycle in August.
The consumer price index is around the midpoint of its target band, last measured at 2.2 percent in the year to September.
The economy desperately needs a boost, as GDP fell 0.2 percent last year.
In per capita terms, New Zealand’s post-pandemic decline has been worse than the impact the country suffered from the 2007-08 global financial crisis.
Finance Minister Nicola Willis said the 125 basis point drop since August meant a family with a $500,000 mortgage, about $180 a fortnight, would be better off if their bank approved the cuts.
“The drop means many New Zealanders can focus more on what matters most to them and less on making the next mortgage payment or whether their card will be declined at the supermarket,” he said.
The OCR cut comes on the first anniversary of Chris Luxon’s Conservative coalition government being sworn in.
Luxon said his government’s efforts to cut public spending were instrumental in the interest rate cuts.
“Mortgage relief is on the way because our plan supports lower inflation,” he said.
Economists point out that the sharper fall in tradable or foreign inflation, including a much lower global fuel price, has a greater impact.