Loose monetary policy coming to an end? The New Zealand central bank rate cut as scheduled but the NZ dollar rises instead of falling.

The Reserve Bank of New Zealand's Monetary Policy Committee lowered the official cash rate (OCR) by 25 basis points to 2.25% on Wednesday, the lowest level in three years, to support the emerging signs of economic recovery. This result matches the predictions of most economists. The Reserve Bank of New Zealand stated, "The Committee notes that lowering the OCR will help support consumer and business confidence, and mitigate the risk of economic recovery pace falling below the level required to achieve the inflation targets. Future adjustments to the OCR will depend on the evolution of medium-term inflation and economic outlook." Meanwhile, the Reserve Bank of New Zealand's latest forecasts indicate a reduced likelihood of another 25-basis-point rate cut next year. As markets bet that the Reserve Bank of New Zealand's easing cycle is nearing its end, the New Zealand dollar instead strengthened, rising by as much as 1.1%. The yields on policy-sensitive two-year New Zealand government bonds rose by 6 basis points to 2.64%. With inflation expected to slow to the middle of New Zealand Reserve Bank's 1-3% target range, most economists believe that policymakers have likely completed this round of easing actions. However, the risk remains of the economy not responding as expected to the monetary stimulus implemented so far, which means the Reserve Bank of New Zealand may still need to retain the possibility of further rate cuts if necessary. Reserve Bank of New Zealand Governor Christian Hawkesby will hold a press conference at 3 p.m. local time, marking his last press briefing before Anna Breman takes over on December 1. According to meeting records, the Reserve Bank of New Zealand's Monetary Policy Committee voted 5-1 in favor of a 25-basis-point rate cut, while a minority of members favored keeping rates unchanged. The Reserve Bank of New Zealand stated, "The rationale for maintaining the OCR unchanged emphasizes that the OCR has already been significantly reduced and its effects are still transmitting through the economy. The rationale for further reducing the OCR emphasizes the significant excess capacity in the economy, which leads to the belief that medium-term inflation will return and remain near the target midpoint." The Reserve Bank's forward guidance indicates that the average OCR will fall to 2.2% in the second quarter of next year, implying a 20% chance of another rate cut. The central bank forecasts that by the end of 2026, this benchmark interest rate will be 2.28%. Since the start of the easing cycle in August 2024, the Reserve Bank of New Zealand has been one of the most aggressive rate cutters among its peers, having cumulatively reduced the OCR by 325 basis points and pausing action only once in 10 meetings. Lower borrowing costs will be welcomed by the center-right government, which is eyeing the 2026 election and promising to restore economic growth. In comparison, the Federal Reserve has cut rates by 150 basis points since September 2024, while the Reserve Bank of Australia has only cut rates by 75 basis points. The Reserve Bank of New Zealand forecasts that economic growth will accelerate in 2026, while inflation will slow down. The central bank expects the annual average GDP growth rate to reach 2.8% in the 12 months ending March 2027, compared to just 0.5% in the 12 months ending March 2026. The central bank stated, "Economic activity was soft in mid-2025 but is recovering. Lower rates are encouraging household spending, and the labor market is stabilizing. The depreciation of the exchange rate is supporting exporters' income." Additionally, the Reserve Bank of New Zealand predicts that inflation will slow down from the current 3% to 2.1% in the third quarter of next year, reaching 2% in one year.