New Zealand’s central bank lowered its policy rate by 25 basis points to 3.00% on Wednesday, the lowest level in three years, and signalled the possibility of further cuts in the coming months amid concerns over both domestic and global growth challenges.
The unexpectedly dovish stance rattled markets, pushing the New Zealand Dollar down 1.2% to a four-month low of $0.5817, while two-year swap rates fell to as low as 2.93%, their weakest since early 2022.
The Reserve Bank of New Zealand (RBNZ) reported that the economy stalled in Q2 and revised its projected cash rate floor down to 2.55%, compared with the 2.85% forecast in May.
Notably, two out of the six policy committee members had even pushed for a deeper 50-basis-point cut on Wednesday.
At a press conference, RBNZ Governor Christian Hawkesby said that future decisions will depend on incoming data but noted that if business and consumer sentiment stay subdued, “and need more support, that might be something that prompts more action.”
The 25-basis-point reduction in the official cash rate was largely anticipated by most economists in a Reuters news agency poll. However, the central bank’s broadly pessimistic outlook on economic risks and interest rates still unsettled markets.
“The fact that members gave serious consideration to an outsized 50bp cut is quite telling,” according to Abhijit Surya, a senior APAC economist at Capital economics.
Since August 2024, the central bank has cut rates by 250 basis points to support a fragile recovery. It noted, however, that “consumption and investment demand appear to have weakened in the second quarter of 2025, partly in response to heightened trade policy uncertainty,” following changes to US tariff policy in April.
In its Monetary Policy Statement, the RBNZ projected the cash rate to reach 2.71% in the fourth quarter, down from the 2.92% forecast in May. For the first quarter of 2026, it now expects the rate to average 2.55%, compared with the earlier forecast of 2.85%, Reuters reports.
“It is possible that pessimistic sentiment, together with the initial negative effects of the global tariff shock, have dampened the effects of the reduction in the OCR since last August,” the RBNZ stated.
Markets swiftly adjusted expectations for additional rate cuts, pricing in around a 50% chance of a reduction in October and more than a full chance of one in November.
The implied policy rate floor has fallen to around 2.57%, down from 2.76% prior to the RBNZ announcement.
ANZ Bank now anticipates two 25-basis-point cuts in October and November, revising its earlier expectations for reductions in November and February, noting that the RBNZ was “much more dovish than expected.”
New Zealand’s annual inflation remains within the RBNZ’s 1%-3% target range at 2.7%, providing the central bank room to lower rates further. The bank forecasts inflation to peak at 3% in the third quarter before easing to around 2% by mid-2026.