By Lucy Craymer WELLINGTON (Reuters) -New Zealand’s central bank cut its benchmark rate by 25 basis points to 3.25% on Wednesday and flagged a slightly deeper easing cycle than it forecast three months ago, underlining the rising economic risks from a sharp shift in U.S. trade policies. U.S. President Donald Trump’s sweeping tariffs and his […]
Business
New Zealand cuts rates 25 bps, flags slightly deeper easing cycle as global risks mount
Audio By Carbonatix
By Lucy Craymer
WELLINGTON (Reuters) -New Zealand’s central bank cut its benchmark rate by 25 basis points to 3.25% on Wednesday and flagged a slightly deeper easing cycle than it forecast three months ago, underlining the rising economic risks from a sharp shift in U.S. trade policies.
U.S. President Donald Trump’s sweeping tariffs and his broader economic agenda have shaken up financial markets and raised fears of a recession, complicating policymaking for central banks and delaying investment decisions across a whole host of industries.
The 25-bps cut was in line with a Reuters poll where all but one of the 30 economists surveyed forecast the Reserve Bank of New Zealand would reduce the cash rate for the sixth successive meeting.
“Inflation is within the target band, and the Committee is well placed to respond to domestic and international developments to maintain price stability over the medium term,” the RBNZ said in a statement accompanying its policy review.
The central bank has slashed rates by 225 basis points since August, with lower inflation giving policymakers leeway to reduce borrowing costs as the economy faces fresh global risks from Trump’s international trade war.
The central bank is now forecasting the cash rate will be at 2.92% in the fourth quarter of 2025 and at 2.85% in the first quarter of 2026, a slightly deeper easing cycle than had been projected in February.
“What the next step is at the next meeting, it will be dependent on developments, and in particular, what those developments mean for medium term inflation pressure in New Zealand,” RBNZ Governor Christian Hawkesby told a press conference after the policy review.
Wednesday’s rate-cut decision was not unanimous with one of the five members of the committee voting to hold the cash rate at 3.5%.
The New Zealand dollar rose to US$0.5970 from US$0.5930, while two-year interest rate swaps increased 11 basis points to 3.23% as the market was caught off guard by the non-unanimous decision.
Nick Tuffley, chief economist at ASB bank, said he wouldn’t place too much weight on the voting outcome.
“The reality is there is little clarity around how the tariffs will impact – not least because no one knows where the tariffs will settle,” he said.
The central bank warned that the U.S. tariff blitz could hurt growth globally and at home, adding that “significant uncertainty” remained over the demand and supply side impacts of Trump’s trade policies.
“The announced increase in U.S. tariffs will lower global demand for New Zealand’s exports, particularly from Asia, constraining domestic growth. Heightened global policy uncertainty is expected to weigh on business investment and consumption in New Zealand,” the central bank said.
FRAGILE GROWTH
A global front-runner in withdrawing pandemic-era stimulus, the RBNZ lifted rates 525 basis points between October 2021 and September 2023 to curb inflation in the most aggressive tightening since the cash rate was introduced in 1999.
The punishing borrowing costs took a heavy toll on demand and tipped the economy into recession last year. While the economy has emerged from the slump, growth remains weak and is being further hampered by a slowdown in the global economy and the government’s tight fiscal policy.
Markets expect lower inflation will give the RBNZ sufficient leeway to cut the cash rate at least once more this year.
New Zealand’s annual inflation remains within the 1%-3% target band at 2.5%, with the RBNZ expecting it to track around the midpoint from next year.
Central Bank chief economist Paul Conway said the cash rate was now within the neutral zone and “it is now more about feeling your way rather than being definitive about policy being stimulatory or otherwise.”
New Zealand is one of several countries to ease rates as inflation has moved lower, but its sharp reductions to borrowing costs contrast with a more cautious approach by the U.S. Federal Reserve and its counterpart in Australia as they assess Trump’s broader U.S. economic agenda.
Shannon Nicoll, associate economist at Moody’s Analytics, said uncertainty is preventing the RBNZ from “gung-ho easing.”
“The central bank will ease a touch more; we figure that 3% is a fair estimate of the neutral cash rate, making for a likely stopping point.”
(Reporting by Lucy Craymer; Editing by Shri Navaratnam)