New Zealand makes disproportionate cuts to try to boost growth

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

The cut in the overnight policy rate was more than the 25 basis points expected by economists polled by Reuters.

In its statement, the Reserve Bank of New Zealand said inflation was expected to return to its 2% target by the first half of next year, while pointing to weak economic activity in mid-2025, justifying a steeper rate cut.

“Slow growth in disposable income and house prices continues 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, down 1.1% year-on-year, compared with a 0.9% decline estimated by economists polled by Reuters.

“This partly reflects domestic constraints on the supply of goods and services in certain industries, as well as the impact of uncertainty on global economic policy.”

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

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

The World Bank on Tuesday raised its growth forecast for China for 2025, amid an overall improvement in projections for East Asia and the Pacific. The World Bank now projects that China’s economy will grow 4.8%, up from 4% forecast in April.

On the domestic front, domestic inflationary pressures continued to moderate, giving the RBNZ greater confidence in containing inflationary pressures, the bank said.

Headline inflation stood at 2.7% in the second quarter, near the top of the RBNZ’s 1% to 3% target range.