WELLINGTON (Reuters) – New Zealand’s central bank may cut interest rates on Wednesday, a year ahead of its own forward guidance, as inflation slows, unemployment rises, and economic growth remains sluggish. This has led markets to increase their bets on a rate cut.
A Reuters poll conducted last week found that out of 31 analysts, 19 expect the Reserve Bank of New Zealand (RBNZ) to keep the cash rate steady at 5.5%, while 12 anticipate a 25 basis point cut. Many analysts acknowledge that the decision could go either way.
Markets have priced in a 76% chance of a rate cut, especially after the RBNZ’s survey on Thursday revealed that inflation expectations had dropped to a three-year low.
The RBNZ, one of the first central banks to wind back pandemic-era monetary stimulus, has maintained the cash rate at 5.5% since May 2023 to curb historically high inflation.
The possibility of the Reserve Bank cutting rates this Wednesday contrasts sharply with its forward guidance from May, which suggested that lower borrowing costs were unlikely before mid-2025.
“The New Zealand economy is contracting, spare capacity is rapidly increasing, and the unemployment rate has not yet peaked. This is reducing inflationary pressure, and importantly, lower wage growth will help decrease stubborn non-tradable inflation,” said Stephen Toplis, head of research at Bank of New Zealand, in a note.
“We believe all the conditions are in place for the Reserve Bank to lower its cash rate now,” he added.
Even if the bank decides to hold interest rates steady, many analysts expect a revision of its forecasts. Almost all of the 31 economists polled by Reuters predict that the central bank will start cutting rates this year, with the majority expecting the cash rate to be at 5.0% by year-end.
Westpac industry economist Paul Clark noted that while he expects the central bank to hold the cash rate at 5.5%, it is likely to signal potential rate cuts later this year and make significant downward revisions to the cash rate projections for 2025.
