New Zealand currency falls as RBNZ reacts to Trump tariffs, steady inflation
New Zealand’s central bank has delivered a shock 50-basis-point rate cut, signalling its growing concern about a faltering economy and hinting at more monetary easing to come – a move likely to ripple across the Tasman and catch the eye of Australian mortgage watchers.
The Reserve Bank of New Zealand (RBNZ) lowered its official cash rate to 2.5%, twice the size of the reduction many economists had forecast, citing a need to shore up growth and keep inflation anchored around its 2% target. The New Zealand dollar slumped nearly 1% in response, while short-term interest rate swaps also dropped sharply.
“The Committee reached consensus to reduce the official cash rate by 50 basis points to 2.5 percent,” the RBNZ said. “The Committee remains open to further reductions in the OCR as required for inflation to settle sustainably near the 2% target mid-point in the medium term.”
Central bank steps harder on the accelerator
The larger-than-expected cut underscores how difficult it has been for policymakers to revive economic momentum. Despite several earlier reductions, growth has remained weak, with the economy contracting by 0.9% in the June quarter.
Prime Minister Christopher Luxon has publicly backed lower borrowing costs, amid a slide in his government’s polling and growing household frustration over sluggish wages and rising job insecurity.
Of 26 economists surveyed by Reuters ahead of the meeting, 15 expected a smaller 25-basis-point cut, while the rest correctly anticipated a more aggressive move. ASB chief economist Nick Tuffley said the RBNZ’s decision suggested “the likelihood of inflation pressures being weaker than previously anticipated carried more weight than waiting to see how quickly the economy rebounds.”
The RBNZ has now trimmed rates by 300 basis points since August 2024, with inflation sitting within its 1-3% target band. Analysts say the central bank still has room to go lower if activity continues to lag.
Trump’s tariffs and tightening fiscal settings weigh on confidence
The central bank’s easing cycle is unfolding against a challenging global backdrop. US President Donald Trump’s sweeping new tariffs and tighter fiscal policy are dampening trade prospects, further clouding business sentiment across New Zealand’s export-dependent economy.
Outgoing Governor Christian Hawkesby, who will be replaced in December by Swedish policymaker Anna Breman, is navigating a delicate balance – stimulating domestic demand without reigniting inflation, which ticked up to 2.7% last quarter and is expected to reach 3% in the third.
The RBNZ expects softer demand to restore inflation to target by 2026. While other economies have begun cautiously lowering borrowing costs, New Zealand’s pace of cuts stands out. By contrast, the Reserve Bank of Australia held steady last week, citing lingering price pressures, while the US Federal Reserve has only just begun its easing cycle.
Housing market shows early signs of life
The RBNZ’s rate cut coincides with tentative signs of revival in New Zealand’s housing market, long a barometer of consumer sentiment. Economist Tony Alexander’s NZHL Property Report points to improving activity this spring, driven largely by first-home buyers taking advantage of lower mortgage rates and higher listings.
“Recovery is underway and the recent cutting of one-year fixed mortgage rates to just below 4.5% will likely spur some additional buyer interest as we head through spring,” Alexander said.
An October survey of more than 250 real estate agents found growing attendance at auctions and open homes, though price expectations remain subdued. The Cotality NZ Home Value Index recorded a 0.1 per cent rise in September – modest, but the first monthly gain since early autumn.
First-home buyers dominate, investors retreat
A net 53% of agents reported seeing more first-home buyers in the market, while just 7% noted an uptick in investor activity. Many landlords continue to sell down their holdings, citing rising insurance and maintenance costs.
“It is probably not going to be safe to talk about a sustained upturn in the housing market until these concerns substantially back off,” Alexander said, referring to ongoing anxiety over employment and income stability.
For Australian brokers and lenders, the shift across the Tasman will be closely watched. With New Zealand often viewed as an early indicator for monetary policy trends, the RBNZ’s decisive move could increase speculation that the RBA may eventually follow suit – though policymakers in Sydney remain cautious, wary of reigniting inflationary pressures still lingering from the pandemic-era boom.
