New Zealand’s central bank reduced its official cash rate by 25 basis points to 2.25% on Wednesday, hitting its lowest level since mid-2022.
However, policymakers indicated that the easing cycle may be over as the economy shows early signs of recovery.
The New Zealand Dollar surged as traders scaled back bets on further rate cuts, with the central bank noting that the board had weighed the options of maintaining rates versus implementing another reduction.
“Future moves in the OCR will depend on how the outlook for medium-term inflation and the economy evolve,” the Reserve Bank of New Zealand (RBNZ) said in its accompanying monetary policy statement.
The RBNZ now projects the cash rate will reach 2.20% in Q1 2026 and 2.65% by Q4 2027. While these figures are slightly below August’s expectations, the outlook signals a hawkish bias, with little room left for further rate cuts.
At a press conference, Governor Christian Hawkesby highlighted the policy shift, noting that while the projection “has a very slight downward tilt,” it aligns with keeping the cash rate on hold throughout 2026.
The New Zealand Dollar surged 1.0% to $0.5682, marking its highest level in over a week, while two-year interest rate swaps climbed 8 basis points to 2.6653% as markets drastically reduced the probability of another rate cut to 22%, down from just over 50% the previous day.
The decision aligned with a Reuters poll in which 32 of 36 economists had predicted a 25-basis-point cut to the RBNZ’s cash rate.
The central bank, which caught markets off guard with a larger-than-expected 50-basis-point cut in October, has eased a total of 325 basis points since August 2024 to support an economy that has shrunk in three of the past five quarters.
The statement noted that inflation risks are balanced and highlighted that, although economic activity was sluggish in mid-2025, it is now gaining momentum as lower interest rates stimulate household spending.
The New Zealand central bank’s cautious stance mirrors that of its peers in Australia and the US Federal Reserve. The Reserve Bank of Australia kept policy unchanged this month after three rate cuts this year, citing persistent inflation concerns.
Furthermore, RBNZ meeting minutes revealed that the committee debated whether to maintain the cash rate or cut it by 25 basis points, with five of the six members ultimately voting for the reduction.
The RBNZ noted that although “significant excess capacity in the economy” supported Wednesday’s rate cut, the board also gave strong weight to upside risks for both inflation and economic output.
The central bank projects that annual inflation, which rose to 3% in Q3, will decline to around 2% by mid-2026, placing it squarely within the 1%–3% target range.