OCR decision: Reserve Bank cuts official cash rate to 5.25 percent

Photo: RNZ

The Reserve Bank has cut the official cash rate by 25 basis points - the first reduction in more than four years.

The central bank said price pressures were cooling and expected annual inflation to fall back to its 1 to 3 percent target band in the September quarter.

Updated forecasts showed the cash rate falling to 4.9 percent by the end of the year - opening up the possibility for cuts in October and November.

Before Wednesday's decision, financial markets had at one stage priced in a 75 percent chance of a 25 basis point rate cut, while economists were slightly tilted towards rates being held.

In the statement, the RBNZ said consumer price inflation was easing.

"Services inflation remains elevated but is also expected to continue to decline, both at home and abroad, in line with increased spare economic capacity," it said.

"Consumer price inflation in New Zealand is expected to remain near the target mid-point over the foreseeable future."

The New Zealand dollar fell by about a third of a cent following the announcement to 60.4 US cents.

The RBNZ said the pace of future rate cuts would depend on the monetary policy committee's confidence that pricing behaviour was consistent with a low inflation environment, and inflation expectations anchored around the 2 percent target.

In the immediate aftermath of the rate cut, Kiwibank reduced various lending and deposit rates.

Notably, Kiwibank's variable term loan was also reduced by 25 basis points.

ASB also reduced all interest rates across its fixed and floating lending rates by 25 basis points.

ASB chief economist Nick Tuffley, who had earlier picked a rate cut, said the RBNZ appeared to be comfortable it could cut rates and keep inflation under control.

"We expect the RBNZ will continue steadily cutting the OCR by 25bp [basis points] in consecutive meetings, with the next cut in October," he said.

"The path from here will be data dependent, as it always is. The speed at which inflation falls relative to RBNZ's current forecasts will be important. If inflation pressures evaporate faster than expected, the RBNZ may need to hasten the return to a more neutral setting of around 3.25 percent."

Wholesale interest rates have been falling recently as financial markets surmised the rate might fall for the first time since March 2020.

The Reserve Bank started increasing the cash rate in late 2021 in response to high inflation, with the OCR reaching its current peak of 5.5 percent in May last year.

However, in recent months, economic data shows inflation slowing, unemployment rising and economic growth stalling.

for ad-free news and current affairs