WELLINGTON (Reuters) -- New Zealand's central bank slashed its benchmark cash rate for the first time since March 2020, sending the kiwi dollar tumbling as policymakers flagged more cuts over the coming months, saying inflation was converging on its target of 1% to 3%.
The decision to reduce rates by 25 basis points (0.25%) to 5.25% came almost a year ahead of the Reserve Bank of New Zealand's own projections, taking some market players by surprise and prompting bets of an aggressive easing path through to the end of 2025.
Markets had priced in almost a 70% chance of a quarter-point reduction following a string of softer economic data, but the cut defied most economists' expectations, with 19 of 31 economists in a Reuters poll having forecast the RBNZ to hold steady, as it had since May 2023.
"The Committee agreed to ease the level of monetary policy restraint by reducing the OCR (official cash rate)," the central bank said in a statement, and signaled more cuts ahead depending on how inflation evolves.
Investors reacted by knocking the kiwi dollar down 1% to $0.6015, erasing most of the 1% gains made overnight as soft U.S. producer price data slugged the U.S. dollar.
Swaps shifted to imply another 29 basis points of easing by October and 67 basis points of easing by year-end. Rates are seen near 3.0% by the end of 2025, well below the RBNZ's projection. Bank bill futures also jumped.
ASB Bank chief economist Nick Tuffley said he expects the RBNZ will continue steadily cutting the cash rate by 25 basis points in consecutive meetings.
"If inflation pressures evaporate faster than expected, the RBNZ may need to hasten the return to a more neutral setting of around 3.25%," Tuffley added. ASB Bank, along with Kiwibank and ANZ bank, announced cuts to their mortgage lending rates.
The central bank did strike a note of caution, emphasizing that policy will need to remain restrictive for a further period, but it still forecast the cash rate at 3.85% by the end of 2025.
"Although the bank seemed to strike a cautious tone about further policy easing, we think it will cut rates more aggressively than many are anticipating," said Abhijit Surya, economist at Capital Economics.
The market's views on further rate reductions reflected the central bank's own gloomy economic projections.
RBNZ Gov. Adrian Orr told a post-policy news conference that growth has weakened since May and concerns around pricing expectations have dissipated.
The central bank expects New Zealand to tip into a technical recession -- two consecutive quarters of economic contractions -- this year.
The RBNZ's forward guidance suggested at least three more cuts by the middle of next year, projecting the cash rate at 4.9% in the fourth quarter of 2024 and 4.4% in the second quarter of 2025. Previously, it had not expected to start cutting rates until the middle of 2025.
New Zealand joins other central banks that are starting to ease rates. The European Central Bank, Canada, Sweden and Switzerland have all cut interest rates, and an increasing number of analysts are now penciling in a half-a-percentage-point rate cut for the Federal Reserve's September meeting.
New Zealand's neighbor Australia, however, is an exception to the global easing trend, with the Reserve Bank of Australia last week ruling out near-term rate cuts.
The RBNZ minutes of the meeting, released alongside its statement, said the committee observed that the balance of risks had progressively shifted since the May monetary policy statement.
"With a broad range of indicators suggesting the economy is contracting faster than anticipated, the downside risks to output and employment that were highlighted in July have become more apparent," the minutes added.
A global front-runner in withdrawing pandemic-era stimulus, the RBNZ lifted rates 525 basis points since October 2021 to curb inflation in the most aggressive tightening since the official cash rate was introduced in 1999.
New Zealand's annual inflation has come off in recent months and is currently running at 3.3%, with expectations that it will return to the central bank's target band in the third quarter of this year.
The rate hikes have sharply slowed the economy, with meager first-quarter growth and recent data indicating still-subdued momentum.
The RBNZ said a broad range of indicators suggested "the economy is contracting faster than anticipated," underlining why policymakers had to move quickly to ease monetary conditions.
