The RBNZ cut its cash rate by 50 basis points to 2.5%

The Reserve Bank of New Zealand (RBNZ) cut interest rates by 50 basis points to 2.5% on Wednesday, taking strong action to boost the weak economy and signalling its readiness to make further cuts if needed.

The bank’s decision indicates that it is concerned about weak demand, slow growth, and the risk that inflation may remain below its target for longer than planned.

RBNZ lowers the cash rate to revive weak economic growth

The Reserve Bank of New Zealand cut its Official Cash Rate (OCR) from 3% to 2.5%. This decision shocked investors, businesses, and economists because they expected a smaller cut of only 25 points.

The bank explained that “economic activity through the middle of 2025 was weak.” The Committee even said it is “open to further reductions in the OCR as required for inflation to settle sustainably near the 2% target.” Such comments suggest that the bank anticipates the economy will weaken further, making these countermeasures justified. 

New Zealand’s economy shrank by 0.9% in the second quarter of 2025, triple the decline the RBNZ had forecast earlier. This large fall suggests that the economy could continue to struggle in the second half of the year. 

Many companies are less willing to hire new workers or invest in new projects because sales are weak and profits are falling. Experts say the situation for people and businesses across the country could worsen if these trends continue, as New Zealand may face another recession before the end of the year.

The RBNZ has lowered its key interest rate by 300 basis points since August 2024. This is more than what other central banks have done over the same period, as the U.S. Federal Reserve cut its main rate by 125 basis points, while the Reserve Bank of Australia lowered its rate by only 75 basis points. 

The bank said it chose to cut interest rates that much because it wants to break the cycle where households and businesses refuse to spend or spend very little due to concerns about the future.

Markets react sharply as the Kiwi dollar slides and rate expectations shift

The New Zealand dollar dropped to about 0.5748 against the U.S. dollar (a decline of nearly 0.9% in a single day) because traders and investors quickly adjusted to the news of the cut, which was larger than expected. 

The New Zealand dollar lost more than 5.7% in value over the past year because the RBNZ has been cutting interest rates faster than other major central banks. Investors expect interest rates to stay low for a while, as government bond yields have also dropped. The yield on the two-year government bond fell seven points to 2.65% because people who lend money to the government think borrowing will remain cheap. 

Economists and market watchers said the bank’s decision will prevent the economy from weakening further. A senior economist at ASB Bank, Jane Turner, said, “The economy may have turned a corner, but we are failing to gain traction — the wheels are spinning in the mud. More support is needed, and the RBNZ needs to move faster before the stimulus arrives too late.”

Turner correctly predicted the 50-basis-point cut and now explains that this larger cut will motivate households and businesses to spend and invest more money. 

Chief economist at Westpac, Michael Gordon, said that the move “supports our view that the RBNZ will deliver a circuit-breaking 50-basis-point cut.” An economist at UBS, Stephen Wu, also stated that surveys indicate that low business confidence necessitates such a significant rate cut. 

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