Photo: RNZ
- The RBNZ has cut the OCR by 50 basis points to 2.5 percent.
- Opinion among economists and markets had been divided between 25 and 50 basis points.
- Economists say front loading of cut has little downside
- The bank's Monetary Policy Committee noted growth is weak and uneven and inflation higher.
- It left the door open for a cut in November.
The Reserve Bank has opted for boldness over caution as it delivered a 50-basis-point cut the official cash rate to 2.5 percent, and signalled further reductions.
It said it considered a smaller cut, but was guided by the outlook, including stronger inflation pressures, and the risk that too small a cut would further hold back the economy.
"A larger reduction in the OCR could mitigate this risk by providing a clear signal that supports consumption and investment," a summary of the Monetary Policy Committee (MPC) meeting said.
The RBNZ said it debated the upside risks to inflation, currently at 2.7 percent, and expected by many commentators likely to go through the top of the RBNZ's 1-3 percent target band.
Unlike the July decision, when two of six members voted for a 50-basis-point cut, the MPC reached a consensus on the size of the rate cut.
"However, with spare capacity in the economy, inflation is expected to return to around the 2 percent target mid-point over the first half of 2026."
More cuts may come
The OCR is now at the lowest level since August 2022, but the central bank made it clear further cuts are on the cards.
"The committee remains open to further reductions in the OCR as required for inflation to settle sustainably near the 2 percent target mid-point in the medium term."
The next decision is due on 26 November, with financial markets already pricing in a 25 basis point cut to 2.25 percent.
A closely followed business survey this week showed firms increasingly downbeat about the outlook, cutting staff and investment, while facing stronger inflation pressures, which was seen as strengthening the case for a bigger cut.
The MPC acknowledged the economy was weak as shown by the bigger than expected 0.9 percent contraction in activity in the three months to June
It said there were signs the economy had posted some modest growth in the September quarter, but accepted that there was downside risk there was more slack than previously thought.
Rate relief for borrowers
Finance Minister Nicola Willis said the rate cut would ease pressure on households and businesses.
"Today's Official Cash Rate shows monetary policy doing its job. The reduction will be welcome news to mortgage-holders and businesses, as OCR drops flow through to interest rates."
"Falling interest rates are good news for growth, jobs, and investment. It also means more money in the hands of families with mortgages."
Kelvin Davidson, the chief economist at property research firm Cotality, said the RBNZ had opted to "front load" support for the economy.
"The bigger, front-loaded 50 basis point cut was probably seen as the least-regrets option, rather than a more 'wait and see approach' of only cutting by 25 basis points."
But he said the rate cut was unlikely to much immediate impact on mortgage rate, given that most of the main banks had already cut fixed rates in advance.
ASB chief economist Nick Tuffley said there were few risks from the bigger cut, and the RBNZ was betting on inflation being weaker than previously expected and decided to up the stimulus of lower rates.
"We expect one further 25 basis point (cut) will help underwrite economic recovery sufficiently. But if it doesn't, the RBNZ could potentially cut even further."
The New Zealand dollar fell about half a cent against the US and Australian dollars, wholesale interest rates also dropped, while the local stock exchange rallied close to a record high.
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