New Zealand delivers outsized cut in bid to boost growth

New Zealand’s central bank on Wednesday cut benchmark interest rates by 50 basis points to 2.5%, bringing the policy rate to its lowest level since July 2022 as growth worries loom.

The cut to the overnight cash rate was larger than the 25 basis points expected by economists polled by Reuters.

In its statement, the Reserve Bank of New Zealand said inflation was likely to return to its 2% target by the first half of next year, while pointing to weak economic activity in the middle of 2025, warranting a sharper rate cut.

“Slow growth in disposable incomes and house prices continue to weigh on economic activity, but lower interest rates are supporting a recovery in consumption,” the bank said.

New Zealand’s GDP contracted more than expected in the second quarter, declining 1.1% year on year compared to the 0.9% drop estimated by economists polled by Reuters.

“In part, this reflects domestic constraints on the supply of goods and services in some industries, and the impact of global economic policy uncertainty.”

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The RBNZ also discussed the impact of trade restrictions and tariffs, and said that global trade volumes and economic activity had proven resilient so far.

Growth forecasts for 2025 have improved for New Zealand’s trading partners, particularly for China, Taiwan, and some other Asian economies, although growth is expected to slow in 2026, RBNZ said.

The World Bank on Tuesday raised its 2025 growth forecast for China as part of an overall boost in projections for East Asia and the Pacific. The World Bank now projects China’s economy to expand by 4.8%, compared with 4% predicted in April.

On the home front, domestic inflationary pressures have continued to moderate, giving RBNZ more confidence that inflationary pressures are contained, the bank said.

Headline inflation came in at 2.7% for the second quarter, near the top of the RBNZ’s target band of 1%-3%.