The Reserve Bank of New Zealand (RBNZ) has decided to cut the official cash rate (OCR) by 50 basis points to 4.75 percent in response to a significant fall in inflation and a sluggish economy. This move comes after the Bank’s previous 25 basis point cut in August, aiming to bring inflation within its target range of 1 to 3 percent.
The RBNZ acknowledged that the economy’s weakness is partly due to its own restrictive monetary policy. Business investment, consumer spending, and employment conditions have been lackluster, with low productivity growth further hindering economic activity. To address these challenges, the Monetary Policy Committee (MPC) agreed on the 50 basis point reduction to maintain low and stable inflation while avoiding unnecessary instability in output, employment, interest rates, and the exchange rate.
Following the rate cut, New Zealand’s banks swiftly announced reductions in their floating mortgage rates, with most implementing the full 50 points. However, the benefits of these adjustments may take time to materialize, as around 66 percent of existing loans with fixed mortgage rates will not see immediate changes.
Looking ahead, the RBNZ’s statement highlights a bleak economic outlook, with weak growth attributed to low productivity and subdued consumer spending and business investment. The bank predicts further declines in employment, house price growth, and net immigration, alongside ongoing fiscal consolidation measures.
Finance Minister Nicola Willis welcomed the rate cut decision, emphasizing its positive impact on controlling inflation and addressing the cost-of-living crisis. Retail NZ also expressed optimism, viewing the announcement as favorable for retailers gearing up for the upcoming busy retail sales period.
Economists are divided on the likelihood of future rate cuts, with some anticipating another 50 basis point reduction at the RBNZ’s final meeting this year. The New Zealand dollar and swap rates reacted to the decision, with the NZ dollar falling and swap rates indicating further easing expectations.
The RBNZ’s decision aligns with global trends of central banks lowering rates to counter inflationary pressures. In contrast, Australia maintains restrictive conditions to combat inflation. This move reflects a broader international approach to managing economic challenges through monetary policy adjustments. Please rephrase this statement.
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