New Zealand significantly reduces interest rates!
Due to economic weakness, New Zealand has accelerated its easing pace. On the morning of October 9th, the Reserve Bank of New Zealand (Reserve Bank of New Zealand) significantly lowered its benchmark interest rate by 50 basis points to 4.75%, marking the second consecutive rate cut. After the announcement, the New Zealand stock market surged significantly, with the New Zealand 50 Index rising nearly 2% at one point. The New Zealand currency exchange rate plummeted significantly, with the New Zealand dollar falling nearly 1% against the US dollar.
The Reserve Bank of New Zealand stated that the sluggish economic activity in New Zealand is partly due to restrictive monetary policy. Business investment and consumer spending have been sluggish, and employment conditions continue to be weak, so interest rate cuts are "appropriate".
On August 14th, the Reserve Bank of New Zealand unexpectedly cut interest rates by 25 basis points, lowering the benchmark rate from 5.5% to 5.25%, while market expectations remained unchanged at the time. This was also the first time since March 2020 that the Reserve Bank of New Zealand had lowered interest rates.
Reduce interest rates by 50 basis points
On October 9th, the Reserve Bank of New Zealand announced a 50 basis point reduction in the benchmark interest rate, from 5.25% to 4.75%. This is the second consecutive interest rate cut by the Reserve Bank of New Zealand, following a 25 basis point rate cut that began in August.
The New Zealand central bank stated that some exporters have benefited from the improvement in export prices. However, global economic growth remains below trend levels, and geopolitical tensions remain a significant obstacle to world economic activity. The New Zealand economy is currently in a state of overcapacity, and price and wage settings are encouraged to adapt to a low inflation economy. Lower import prices have fueled deflation. The committee unanimously agreed that lowering the benchmark interest rate by 50 basis points is appropriate to achieve and maintain low and stable inflation, while seeking to avoid unnecessary instability in output, employment, interest rates, and exchange rates.
The Reserve Bank of New Zealand stated that members of the Monetary Policy Committee unanimously agree that the stance of monetary policy is consistent with ensuring low and stable inflation. Since the monetary policy statement in August, the New Zealand economy has largely developed as expected. The committee unanimously believes that overcapacity has suppressed inflation expectations, and price and wage changes are now more in line with a low inflation environment. According to the assessment, New Zealand's annual consumer price inflation rate is currently within the committee's target range of 1% to 3%, and is expected to converge to the midpoint of the 2% target.
The New Zealand Monetary Policy Committee unanimously believes that domestic economic activity in New Zealand is weak. Members unanimously agree that the increase in overcapacity has reduced the inflationary pressure on the New Zealand economy. The sluggish economic growth is partly due to slow productivity growth, but mainly due to weak consumer spending and business investment. High frequency indicators indicate sustained sluggish growth in the short term. Some export enterprises are supported by rising export prices, especially in the dairy industry.
The labor market situation is expected to further ease, with job vacancies and advertising vacancy rates continuing to decline. More generally, weak housing price growth, lower net immigration levels, and continued fiscal consolidation due to spending restrictions are expected to limit overall demand growth.
The New Zealand Monetary Policy Committee pointed out that although wholesale and bank interest rates have decreased, financial conditions are still limited and credit demand remains sluggish. The borrower's current preference for short-term mortgage interest rates will accelerate the impact of benchmark interest rates on household cash flow in the coming months.
In addition, members of the New Zealand Monetary Policy Committee discussed how recent events in the Middle East pose significant risks to global economic activity and energy prices. If the conflict escalates, oil prices and transportation costs may rise, and negative investor sentiment may trigger asset price adjustments and financial tightening. Members pointed out that the current market pricing of risks is particularly sensitive to unexpected economic downturns.
The increasing uncertainty of the US presidential election, as well as its impact on US trade and fiscal policies, may also have a significant impact on international financial markets and global economic activity.
The New Zealand Monetary Policy Committee acknowledges that the outlook is largely consistent with the August monetary policy statement. Members unanimously agree that the 4.75% benchmark interest rate remains restrictive and enables monetary policy to respond well to any short-term surprises. The committee confirms that future changes in the benchmark interest rate will depend on its assessment of the continuous development of the economy.
Or could it be reduced by another 50 basis points?
In response to the latest interest rate cut by the Reserve Bank of New Zealand, Paul Bloxham, Chief Economist for HSBC Australia and New Zealand, stated in an interview with CNBC that the Reserve Bank of New Zealand may cut interest rates by another 50 basis points at its next meeting in November.
We believe there may be more interest rate cuts, which is a good thing for the Reserve Bank of New Zealand as they have already restored inflation to the level they want. Bloxham pointed out that New Zealand will release its third quarter inflation data next week and will see inflation fall back to the target zone. Therefore, he predicts that the bank will implement a series of 25 basis point "series" measures in 2025, and predicts that the policy interest rate will reach 3.25% by the end of 2025 and 3% by early 2026.
The New Zealand economy is stagnant, unemployment is rising, and housing prices are falling due to long-term high borrowing costs suppressing demand. Economists say inflation is currently slowing rapidly, with some warning that inflation may fall below the 2% midpoint of the Reserve Bank of New Zealand's 1-3% target range.
Nick Tuffley, Chief Economist of ASB Bank in Auckland, said that the Reserve Bank of New Zealand has provided almost no clues about what the next step is, and another 50 basis point interest rate cut is "not yet a certainty". However, we see the risk that the data will lean towards the weak side expected by the Reserve Bank of New Zealand, "said Nick Tuffley, continuing to anticipate another 50 basis point rate cut in November.
The Reserve Bank of New Zealand stated in May this year that it would not begin to relax policies until the second half of 2025. However, three months later on August 14th, the Reserve Bank of New Zealand unexpectedly cut interest rates by 25 basis points, lowering the benchmark rate from 5.5% to 5.25%, with market expectations remaining unchanged at the time. Prior to this, the Reserve Bank of New Zealand was one of the first central banks to withdraw monetary stimulus policies during the pandemic, maintaining cash rates at 5.5% since 2023 to curb historically high inflation.
After announcing its first interest rate cut in August, the Reserve Bank of New Zealand stated that although the domestic financial environment is still constrained, it has relaxed in recent months; The committee observed that since the monetary policy statement in May, the risk balance has gradually changed; A series of indicators indicate that the domestic economy is weak, and it is expected that employment growth will further weaken in the coming quarters, with a larger output gap than the negative value expected in May; The committee members pointed out that monetary policy will need to remain restrictive for a period of time to ensure that domestic inflationary pressures continue to dissipate.
It is worth noting that currently, many central banks in various countries have begun to cut interest rates, and the Federal Reserve launched its easing cycle last month by cutting interest rates by 50 basis points. The Reserve Bank of Australia is a clear exception, as it has stabilized its key interest rate at 4.35% due to the risk of rising inflation.
On Tuesday of this week, Federal Reserve official Boston Fed President Collins stated that interest rate cuts should be cautious and based on data. Collins said that policymakers should adopt a cautious, data dependent approach when lowering interest rates to help maintain the strength of the US economy. Collins said that recent data, including the heavyweight September employment report released last week, shows that the overall situation of the US labor market is good. She also expressed increasing confidence that inflation will "timely" return to the Federal Reserve's target level, while the labor market will remain healthy.
Looking ahead, maintaining the current favorable economic conditions will require adjusting the monetary policy stance to avoid unnecessary constraints on demand, "Collins said in a speech prepared for the Boston Fed's community bankers conference on Tuesday. It is appropriate to achieve policy normalization in a cautious, data-driven manner while balancing the dual mission of maintaining price stability and achieving full employment