By Lucy Craymer
WELLINGTON (Reuters) -New Zealand's central bank held the benchmark interest rate at 3.25% on Wednesday, noting near-term inflation risks, but said it expected to loosen monetary policy if price pressures continued to ease as forecast.
The decision was in line with a Reuters poll in which 19 of 27 economists surveyed projected the Reserve Bank of New Zealand would hold the cash rate for the first time since it started a cutting cycle in August 2024.
The central bank has cut rates by 225 basis points since August, but with inflation at 2.5% and concerns that trade tensions could add to price pressures, policymakers have adopted a more cautious approach.
The minutes from the meeting said the RBNZ expected to lower the rate in line with projections released at its May meeting and highlighted the case for waiting until August to cut further in light of near-term inflation risks.
The bank expects inflation will reach the top of the 1% to 3% target band in second and third quarters of 2025.
"The economic outlook remains highly uncertain," a statement accompanying the decision said. "Further data on the speed of New Zealand’s economic recovery, the persistence of inflation, and the impacts of tariffs will influence the future path of the Official Cash Rate."
Abhijit Surya, senior APAC economist at Capital Economics, said while current expectations implied a terminal rate of 2.75%, he expected it would go to a low of 2.5%.
"We continue to believe that the Bank is understating the downside risks to activity and inflation," Surya said.
The New Zealand dollar was down 0.3% at $0.5977 as markets saw at least one more cut following the central bank statement. Two-year-swap rates were flat at 3.16% as they pushed back expectations for a cut until the August meeting.
A global front-runner in withdrawing pandemic-era monetary stimulus, the RBNZ aggressively lifted rates 525 basis points between October 2021 and September 2023 to curb inflation.
The punishing borrowing costs took a heavy toll on demand and tipped the economy into recession last year. While the economy has emerged from the slump, parts of it remain weak and growth is further hampered by slower global conditions and tight fiscal policy.
The statement said while elevated export prices and lower interest rates are supporting a recovery in New Zealand, heightened global policy uncertainty and tariffs are expected to reduce global economic growth.
"This will likely slow the pace of New Zealand's economic recovery, reducing inflation pressures," it said.
Story ContinuesNew Zealand is one of several countries to ease rates as inflation has moved lower. Its sharp reductions in borrowing costs contrast with a more cautious approach by the U.S. Federal Reserve and its counterpart in Australia as they assess Trump's broader U.S. economic agenda.
The Reserve Bank of Australia stunned markets on Tuesday by leaving its cash rate unchanged at 3.85%, higher than New Zealand's rate and dashing expectations for a cut.
(Reporting by Lucy Craymer; Editing by Sam Holmes)
