The Reserve Bank of New Zealand (RBNZ) cut interest rates today by 50 basis points to 4.25%. The decision was in line with economists’ expectations. Despite this, the New Zealand dollar (NZD) has strengthened significantly since the decision and is now the strongest G10 currency.
The market’s reaction is quite contrary to RBNZ’s relatively dovish stance. Before the announcement, the market priced in nearly a 30% chance of a triple rate cut, or 75 basis points. This may have caused some surprise and contributed to the NZD’s appreciation. On the other hand, most economists and the RBNZ’s forecasts aligned with the published decision. For this reason, the scenario of a more significant easing was merely market speculation. Currently, the market prices a 71% chance of a double cut at the next RBNZ meeting on February 19, compared to nearly 65% before today’s decision. By May 2025, the implied level of interest rates has not changed significantly and remains around 3.40%.
Another piece of information that may have been perceived as slightly hawkish by the market was Governor Adrian Orr’s comment during the press conference. Orr noted that he expects greater price volatility due to geopolitical reasons, indirectly referencing Donald Trump’s trade policies.
Summary of the RBNZ decision:
- Headline and core inflation are close to the mid-point of the 1–3% target range; inflation expectations are aligned.
- Economic growth is below potential, with significant spare capacity and weak employment growth.
- Another OCR reduction is likely early next year in February if conditions remain favorable.
- Major economies (USA, China, Europe) show subdued growth with persistent geopolitical risks.
- The board sees no conflict between achieving inflation targets and maintaining financial stability.
- Growth is expected to rebound in 2025, driven by lower interest rates, but the pace remains uncertain.
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