- RBNZ delivers expected 25 basis point rate to 2.25 percent
- It says patchy economic recovery justifies cut
- RBNZ expects inflation to ease towards 2 pct target next year
- Door left open for possible further cut
- Monetary committee voted 5-1 for a cut against hold
The Reserve Bank has cut the official cash rate to its lowest level in three years to support economic recovery.
The central bank dropped the rate by 25 basis points to 2.25 percent, the lowest since June 2022.
The bank's rate setting committee says the economic recovery is patchy and slow but inflation is expected to ease next year, allowing another reduction.
The cut was expected and brings the OCR to a three-year low.
The cut was another split decision, which may be the last in the current cycle.
The central bank's monetary policy committee (MPC) voted five to one for a smaller cut after October's outsized 50 point reduction.
But it noted it did not want a delay in getting inflation back into the target band mid-point, and there was "low tolerance" in the achieving that.
"The committee noted that a reduction in the OCR would help to underpin consumer and business confidence and lean against the risk that the economy recovers more slowly than needed to meet the inflation objective."
It said inflation - which is at the top of the RBNZ's 1-3 percent target band - was expected to ease back given the spare capacity in the economy.
"Risks to the inflation outlook are balanced. Greater caution on the part of households and businesses could slow the pace of New Zealand's economic recovery.
"Alternatively, the recovery could be faster and stronger than expected if domestic demand proves more responsive to lower interest rates. "
'We're now on the up' - Finance Minister
Speaking to reporters at Parliament, Finance Minister Nicola Willis said it was clear that previous rate cuts were now flowing through into stronger economic activity.
She noted that the Reserve Bank had not indicated a need for further significant cuts, erring instead toward stabilisation.
"What they're forecasting is that this could potentially be the bottom of the interest rate reduction cycle, which would align with the view that we've reached the trough in the economy, and we're now on the up."
Willis said she was "acutely conscious" that many New Zealanders were still struggling and would have liked a recovery to come sooner.
She said the independent forecast gave strong reason to believe "growth is ahead of us and better times are ahead of us".
Labour's finance spokesperson Barbara Edmonds said the central bank was having to cut rates to prop up the stalling economy.
"That's not bragging material for any government," she said. "[The prime minister] has no plan to turn the economy around and is instead relying on the Reserve Bank to do the job he can't."
In response, Willis said Labour needed to go study some economics. "Why don't they just celebrate some good news for once?"
Door ajar for more cuts
Most economists expect the RBNZ has now finished its rate cutting, which has seen the OCR slashed by more than 3 percentage points from 5.5 percent in just over a year, but generally agreed that the RBNZ would leave itself flexibility if the economy continues to struggle.
The MPC said it looked hard between a cut now and staying on hold.
"Leaving the OCR unchanged at this meeting would provide the optionality to lower the OCR in the future if required."
But it did not close the door to further easing.
"Future moves in the OCR will depend on how the outlook for medium-term inflation and the economy evolves."
The next decision is due on 18 February, when the new governor Anna Breman will have taken up her role.
Following the RBNZ decision, the New Zealand dollar rose about 1 percent against the US dollar to 56.75 cents.
One and done?
ASB chief economist Nick Tuffley said the door for further easing remained open, but not as wide as many would have expected.
"The RBNZ's OCR track reaches a low of 2.20 percent - hinting at a sniff of further easing, but not as 50:50 as markets had anticipated," he said in a note.
Tuffley said eyes were on the central bank's forward thinking.
"On that front, the RBNZ was a bit more cautious than generally expected," he said. "The RBNZ will cut again if needed, but mainly if the economy looks set to underperform its latest forecasts."
Tuffley said economic forecasts looked reasonable for the RBNZ, and early signs of economic recovery were showing in job market indicators.
"Our base case is the RBNZ will keep the OCR on hold now at 2.25 percent, and watch closely for various lagged stimuli to work through with more effect," he said.
"If the economic recovery underwhelms, then the RBNZ could cut again. But, barring nasty surprises, the RBNZ looks on hold now."
KiwiBank chief economist Jarrod Kerr said it had taken a long time to get interest rates to a level that can stimulate growth
"But we are there now, and I think interest rates are starting to entice investors back into markets, starting to entice a few businesses into investing."
However he told Checkpoint that economic activity was patchy across the country.
"We talk of green shoots and we have been talking of green shoots for a while now, and they're certainly not even across the playing field, they're very patchy indeed.
"Agriculture and horticulture and most of our exporters, including tourism, are doing reasonably well and we're seeing that in rural communities. And then there's other areas where there are simply no green shoots and they're going backwards, like construction and parts of retailing, so it is pretty patchy across the economy, we do need that recovery to broaden out next year."
He said the OCR was now at a level that could make a real difference.
"We've been in bad shape, let's not sugar coat it at all, last year was a really bad recession, and in the June quarter we fell back into it... So this recession has lasted over two years and businesses have done it really hard over the past couple of years."
He said Kiwibank was still hearing from a lot of businesses that had not seen any green shoots yet, but the picture looked brighter for next year.
"I think the first half of the year will feel pretty patchy, but I am hoping things gain momentum and we see quite a broad based recovery over the second half of next year."
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