RBNZ's Third Half-Point Rate Cut: A Shot in the Arm for New Zealand's Economy

The Reserve Bank of New Zealand (RBNZ) has delivered its third consecutive half-point rate cut, lowering the Official Cash Rate (OCR) by 50 basis points (bps) to 4.25%. This decision, announced in November 2024, is a clear signal that the RBNZ is committed to reviving the New Zealand economy. The move aligns with market expectations and is aimed at supporting economic activity, while maintaining low and stable inflation.

The RBNZ's monetary policy statement and minutes of the interest rate meeting provide valuable insights into the expected outcomes of this rate cut. The Committee agreed that a 50 basis point cut is consistent with their mandate of maintaining low and stable inflation, while seeking to avoid unnecessary instability in output, employment, interest rates, and the exchange rate.



The RBNZ's updated economic forecasts indicate that the OCR is expected to be at 4.07% in March 2025 (previously 4.62%) and 3.55% in December 2025 (previously 4.12%). These projections suggest a continued easing of monetary policy, which should support GDP growth by encouraging consumer spending and business investment.

The RBNZ's decision to lower interest rates is expected to have several implications for the New Zealand economy. Firstly, it should improve housing affordability by reducing the cost of borrowing for homebuyers. This, in turn, could stimulate demand for mortgages and contribute to a recovery in the housing market. Secondly, a weaker New Zealand dollar (NZD) exchange rate, which is likely to result from the rate cut, could make New Zealand's exports more competitive internationally, potentially boosting export earnings and contributing to an improvement in the trade balance.

However, the RBNZ has also noted that there is a risk of greater inflation volatility over the medium term, which could be influenced by factors such as geopolitical tensions and climate conditions. A weaker NZD could also contribute to inflation by making imported goods more expensive. The RBNZ will continue to monitor these factors and adjust monetary policy as needed to maintain low and stable inflation.

In conclusion, the RBNZ's third consecutive half-point rate cut is a significant step towards reviving the New Zealand economy. The decision is expected to improve housing affordability, stimulate demand for mortgages, and potentially boost export earnings. However, the RBNZ remains vigilant in monitoring inflation and other economic indicators to ensure that the rate cut supports economic growth without compromising the stability of the New Zealand economy.