As our friends across the ditch in New Zealand continue to grapple with sluggish economic activity, weak business investment and soft consumer spending, the Reserve Bank of New Zealand (RBNZ) has decided to slash the official cash rate by 50 basis points to 4.75%.
Second consecutive cut
This marks the second consecutive rate cut by the central bank, following a 25-basis-point reduction in August in an attempt to reverse the trend of weakening economic conditions.
The call represents a sharp shift in policy from earlier in the year when the RBNZ had flagged potential hikes.
But the bank has since observed that this restrictive monetary policy contributed to a slowdown in the economy, with employment conditions deteriorating and low productivity growth further constraining activity and is now using easing to redress the situation.
The swift change in policy has raised concerns among economists, with some describing it as a "flip-flop" between the bank’s stance in May and its current trajectory of easing.
Further economic contraction
New Zealand's economy faces increasing challenges. The country has recently moved in and out of technical recession, with some economists predicting a further economic contraction in the coming quarters.
One of the key areas of concern for New Zealand is the softening labour market, which has been affected by both domestic economic conditions and external factors.
The recent surge in weekly jobless claims has been attributed in part to the impacts of Hurricane Helene over in the US, but with far reaching supply chain implications, and further disruptions are expected from Hurricane Milton, which made landfall in Florida earlier this month.
In a statement, the RBNZ said the Monetary Policy Committee had discussed the merits of both a 25-basis-point and a 50-basis-point cut, ultimately agreeing that the larger reduction was necessary to achieve its inflation target while mitigating potential instability in employment and economic output.
Despite this, the RBNZ appeared more optimistic in its October meeting about the direction of inflation, which is now seen as heading towards the bank's target range of 1-3%.
Economists are tipping further rate cuts on the horizon as the RBNZ continues to battle subdued economic conditions.
Some analysts expect another 50-basis-point reduction as early as next month, depending on forthcoming economic data.
International community watches
RBNZ will be closely watching inflation figures, due out in late October, and employment data, expected in early November, to guide its policy decisions.
The RBNZ’s shift from a tightening to an easing cycle has also drawn attention internationally, as global counterparts watch how the central bank manages its policy in response to a slowing economy.
In light of the deteriorating economic conditions, there are concerns that New Zealand could face a "triple-dip" recession if growth contracts again in the next quarter.
While the outlook is not as severe as past downturns, such as the 1990s recession or the 2008 global financial crisis, the slowdown is already having a notable impact on employment and business confidence.