- The Reserve Bank cut the official cash rate by 25 basis points to 2.25%.
- The rate is projected to be the lowest in this cycle, with a small chance of further cuts.
- The Kiwi dollar and two-year swap rates rose following the announcement, indicating a more hawkish tone.
The Reserve Bank has cut the Official Cash Rate by 25 basis points to 2.25% but has reduced the odds of another cut in February.
The 25-basis-point cut was widely expected by markets and economists.
But expectations for another cut in February were evenly balanced, and markets had even priced in a small chance of a 50-basis-point cut today.
In the end, the Monetary Policy Committee only debated whether to leave the rate unchanged or to cut by 25 basis points.
It published a rate track suggesting this is likely to be the lowest the official cash rate goes in this cycle.
With a projected rate of 2.2% by March, it leaves a small chance of a further cut – but much smaller than markets had expected.
Speaking at the MPC press conference, acting Governor Christian Hawkesby said the published rate track was consistent with an OCR that was “on hold”.
The 2.2% projection reflected the small chance that, if there were to be a change in the rate in the coming months, it would still most likely be down rather than up, he said.
The easing cycle now looked “done and dusted,” said ANZ chief economist Sharon Zollner.
“The accompanying OCR track bottoms out at 2.2% versus 2.55% in August, implying only a 20% chance of a follow-up 25bp cut,” she said.
“Unless the economy is hit with some kind of unexpected negative shock, the OCR is not going any lower.”
Markets had been caught on the “back foot” a bit by the slightly more hawkish tone of the bank, said ANZ senior strategist David Croy.
In other words, despite the bank describing the risks between a slower recovery and higher inflation as “balanced”, the projections suggest inflation risk has weighed more heavily.
Keeping inflation between the target band of 1-3% is now the single mandate for the Reserve Bank of New Zealand (RBNZ).
The Kiwi dollar rose 30 basis points, and the two-year swap rates rose five basis points to 2.64% in the immediate aftermath of the call.
The case one member of the Monetary Policy Committee made for holding the Official Cash Rate (OCR) emphasised the considerable reduction in the rate to date, which was still working its way through the economy.
“Economic indicators are recovering, and economic activity is expected to strengthen through 2026,” the committee said.
Particular emphasis was placed on the upside risks to inflation and output.
The committee voted by five to one to reduce the OCR by 25 basis points to 2.25%.
“The door for further easing is open, but not as wide as many would have expected,” said ASB chief economist Nick Tuffley.
Tuffley said the Reserve Bank was a bit more cautious than generally expected.
“The RBNZ will cut again if needed, but mainly if the economy looks set to underperform its latest forecasts.”
An initial read of the commentary and the detailed forecasts suggested a likelihood that this will be the final cut in the cycle, said Kelvin Davidson, chief property economist at Cotality.
It was “time now for everyone to sit back and watch how the effects play out”, he said.
In the housing market, today’s rate cut may not make too much difference, he said.
“After all, many banks had already been lowering fixed mortgage rates in previous weeks.”
The Co-operative Bank cut its floating mortgage rate by 31 basis points to 4.99% immediately after the OCR cut while Westpac trimmed its variable home loan rates by 20 basis points and business rates by 25 basis points.
Westpac said it would leave its variable deposit rates unchanged.
New Governor Dr Anna Breman starts with the Reserve Bank next week.
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.
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