RBNZ Slashes Rates to 4.75% Amid Economic Sluggishness

This follows a 25-basis-point reduction in August 2024, marking the first cut since March 2020.

The decision comes as annual consumer price inflation falls within the target range of 1 to 3%, approaching the 2% midpoint. However, the New Zealand economy remains sluggish, with weak business investment, declining consumer spending, and softening employment conditions. Additionally, low productivity growth continues to hinder economic progress.

Today’s rate cut aims to maintain price stability while mitigating risks to output, employment, and the exchange rate.

Recession Alarm Bells as RBNZ Slashes Rates

Despite the recent easing of inflationary pressures and housing costs, which contributed to the RBNZ’s decision to cut interest rates, the economy continues to face significant challenges. Local growth remains weak, driven by subdued consumer spending and business investment, alongside low productivity growth.

The Westpac McDermott Miller Consumer Confidence Index rose to 90.8 in the third quarter of 2024, up from 82.2 in the previous quarter, signalling modest improvement. However, overall consumer sentiment remains pessimistic.

This subdued confidence can be traced to persistent financial pressures faced by many households. Rising interest rates, increased living costs, and a slowing economy are contributing to financial strain, dampening consumer spending. Households remain cautious about their financial prospects and are hesitant to make major purchases, which could further impact economic growth in the near term.

In the business sector, investment has slowed considerably. Businesses are postponing or cancelling planned investments due to rising costs, increased interest rates, and a weaker economic outlook. This decline in investment poses a concern for long-term productivity and economic potential.

In the second quarter, the economy contracted by 0.2%, less severe than the 0.4% contraction economists expected and the 0.5% forecast by the RBNZ. On an annual basis, the economy shrank by 0.5%, though first-quarter growth was revised upward to 0.1%, reflecting an uneven performance. Weakness was particularly evident in sectors such as retail trade, accommodation, agriculture, forestry, and wholesale trade.

Global Risks Weigh on New Zealand’s Growth

New Zealand’s economic prospects face additional challenges due to weakening demand from two key export markets: China and the United States.

China, the world’s second-largest economy, is at risk of missing its 5% growth target this year. The World Bank recently revised its projections, forecasting China’s growth to fall to 4.3% in 2025, down from an expected 4.8% in 2024. Although recent stimulus measures provided a temporary boost, concerns linger over declining wages, reduced property income, and rising public debt. These factors, coupled with uncertainties surrounding health, ageing, and job security, as well as rising geopolitical tensions, are dampening consumer confidence.

Meanwhile, in the U.S., following signs of a slowing job market and inflation easing toward the Federal Reserve’s 2% target, the Fed cut interest rates by 50 basis points in September to a range of 4.75-5%. However, this move raised concerns about the health of an economy that required stimulation in the first place. Global instability, with ongoing conflicts in Ukraine and the Middle East and the upcoming U.S. election, further complicates the outlook for U.S. economic growth.

NZD/USD Declines Following RBNZ Rate Cut

After peaking in late September, the NZD/USD pair has been on a downward trajectory, losing around 4.4% from its recent high. The pair has now entered the Ichimoku cloud, often interpreted as a neutral zone where supply and demand forces are balanced. Bearish signals from both the RSI and MACD indicators reinforce the current downward momentum.

What to Expect from the RBNZ for the Rest of the Year

The RBNZ’s MPC carefully weighed the impact of a 25-basis-point versus a 50-basis-point cut to the OCR, ultimately opting for the larger reduction to 4.75%. This aligns with their mandate to maintain price stability while minimising economic volatility. Although the economic outlook remains consistent with the August Monetary Policy Statement, the MPC acknowledges that the current OCR is still restrictive and is prepared to adjust policy based on evolving conditions.

With inflationary pressures easing, economists predict further monetary easing from the RBNZ. Another significant rate cut is expected in November, with inflation data due on October 17th. Market projections suggest that rate cuts could continue into 2025, with the OCR potentially falling to 3% by August.

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