On Wednesday, February 19th, the Reserve Bank of New Zealand cut interest rates by 50 basis points as scheduled to 3.75%. The following is the full text of the monetary policy statement and meeting minutes:

Monetary Policy Statement:

As inflation eases, the official cash rate (OCR) has been lowered to 3.75%.

The annual consumer price inflation rate is still close to the midpoint of the Monetary Policy Committee's target range of 1% to 3%. The inflation expectations of the enterprise are in line with the target, and core inflation continues to fall towards the midpoint of the target. The economic outlook is consistent with the medium-term inflation target range, which gives the committee confidence to continue lowering OCR.

New Zealand's economic activity remains weak. Due to the existence of idle production capacity, domestic inflationary pressure continues to ease. Price and wage setting behavior is adapting to a low inflation environment. The decrease in import prices has also driven down overall inflation.

Economic growth is expected to recover by 2025. Lower interest rates will stimulate spending, although increased global economic uncertainty may inhibit business investment decisions. The rise in prices of some key commodities and the decline in exchange rates will increase export revenue. With the domestic economic recovery, it is expected that employment growth will rebound in the second half of this year.

In the short term, global economic growth is expected to remain weak. Geopolitical factors, including uncertainty over trade barriers, may weaken global growth. Given the intensification of geo economic fragmentation, global economic activity may also remain fragile in the medium term.

Due to the decline in exchange rates and the rise in oil prices, consumer price inflation in New Zealand is expected to fluctuate in the short term. The net impact of future trade policy changes on inflation in New Zealand is currently unclear. However, the committee has the ability to maintain price stability in the medium term. Consumer price inflation is approaching the midpoint of the target range, putting the committee in the best position to cope with future inflation shocks.

The Monetary Policy Committee agreed today to lower the official cash rate (OCR) by 50 basis points to 3.75%. If economic conditions continue to develop as expected, there is room for the committee to further lower OCR in 2025.

Summary of Meeting Minutes for February 2025

The annual Consumer Price Index (CPI) inflation remains within the target range of 1% to 3% set by the Monetary Policy Committee, and the core inflation indicator continues to approach the midpoint. The inflation expectations of enterprises are approaching the midpoint of the target.

The period of restrictive interest rates has reduced the demand for the New Zealand economy and pushed down inflation. The sluggish global economic activity, reduced net migration, and decreased government consumption have slowed down domestic demand. The increased policy uncertainty related to global trade development may also reduce business investment. It is expected that overall inflation will rise in the coming quarters, but still remain within the target range. This increase reflects the decline in the New Zealand dollar exchange rate and the rise in oil prices. The committee expects that these relative price changes will not affect mid-term inflation. Future inflation expectations, pricing intentions of enterprises, and the degree of idle capacity are consistent with the sustainable achievement of CPI inflation targets. This provides background and confidence for the committee to continue lowering OCR, and the rate of reduction is faster than the November forecast.

Global economic activity is expected to remain weak

The committee pointed out that the GDP growth of many major trading partners is still below their potential level. In contrast, the US economy maintains strong growth. It is expected that the GDP growth of trading partners will slightly decrease by 2025. Since November, with the recent release of US trade policy announcements, global economic uncertainty has significantly increased. In the short term, we expect the intensification of economic uncertainty to limit trading partners and business investment in New Zealand.

Global overall inflation has slightly increased, reflecting rising energy prices

The committee discussed the inflation situation of New Zealand's trading partners. Overall inflation has decreased in the past year, but has slightly increased in recent months. Many trading partners' recent overall inflation increase is mainly attributed to the rise in fuel and energy prices. Market participants expect that the central banks of most developed economies will continue to lower policy interest rates in the coming year. Market pricing shows that the decrease in US policy rates is lower than the assumption made in the November statement.

New Zealand's GDP growth is expected to rebound, reducing idle capacity in the economy

The committee discussed the recent domestic economic development situation. Domestic economic activity remains below trend levels, reflecting a decline in activity in interest sensitive industries such as construction, manufacturing, retail trade, and commercial investment. In contrast, there has been an increase in activities in the primary sector. Despite sluggish global growth, New Zealand's export prices remain stable. The global supply conditions in the beef and dairy markets support export prices. In addition, the decline in the New Zealand dollar exchange rate will increase the revenue of New Zealand's export sector.

In recent months, timely indicators of economic activity, including a series of business surveys, have improved. Lower interest rates and higher export revenues are expected to support economic growth. Due to sustained weak productivity growth and reduced net migration, potential GDP growth is limited, and it is expected that the growth rate will be relatively moderate. According to the 2024 semi annual economic and fiscal update, government spending is expected to decrease as a percentage of the economy in the medium term.

GDP revision better explains the evolution of core inflation over the past two years

Since the November announcement, the GDP data has undergone significant revisions. These revisions indicate that the level of economic activity in New Zealand in 2024 is higher than the assumption made in November. However, the revision also indicates that the New Zealand economy experienced a greater contraction in mid-2024. Overall, there is significant idle capacity in the economy, slightly higher than the assumption in November.

The new GDP data helps explain the evolution of core inflation and broader indicators of capacity pressure over the past two years. The high GDP level at the beginning of 2024 is consistent with the signal of high-frequency data at that time. The decline in GDP in mid-2024 is also more in line with high-frequency data, which is one of the factors contributing to the downward adjustment of OCR outlook in August.

Employment remains weak, but is expected to improve later this year

The committee discussed the state of the New Zealand labor market. The slowdown in wage growth is consistent with the decline in worker demand and CPI inflation. The decline in employment levels and job vacancies reflects weak economic activity. Due to employment growth typically lagging behind economic growth, it is expected to rebound in the second half of this year. The net immigration to New Zealand has significantly decreased from its high level in recent years. In the past year, the number of immigrants arriving has slowed down and the number of New Zealanders leaving has increased, partly due to the relative weakness of the Australian labor market.

Lower OCR continues to propagate to mortgage and term deposit interest rates

The committee pointed out that since the November statement, wholesale interest rates in New Zealand have generally decreased due to a decline in OCR and weaker than expected economic activity. The decline in wholesale interest rates is reflected in the decrease in mortgage and term deposit interest rates. The average interest rate on outstanding mortgage loans has now peaked and is expected to decline in the next 12 months as borrowers will re fix mortgage rates at lower rates.

Financial system maintains stability

The committee unanimously believes that there is currently no substantial trade-off between achieving inflation targets and maintaining financial system stability. Some families and businesses continue to face financial pressure. Although the non-performing loan ratio is still lower than during past economic downturns, some financial pressures will continue in the short term even if the economy recovers. The banking system has sufficient capital and good financial condition, which can support customers.

Inflation is expected to remain within the target range

The committee discussed domestic inflationary pressures. The overall CPI inflation and the inflation expectations of enterprises in various time ranges are close to the target midpoint. The core inflation indicator continues to approach the midpoint of the target. The survey shows that household inflation expectations remain high and fluctuate greatly.

Non trade inflation has decreased, but remains at a high level. Due to the continued existence of idle production capacity in the economy over the next 12 months, the committee is confident that domestic inflationary pressures will continue to ease.

It is expected that overall inflation will rise in the coming quarters, reflecting a decline in the New Zealand dollar exchange rate and an increase in oil prices, but will still remain within the target range. However, potential inflationary pressures are expected to continue to ease, and the overall annual CPI inflation is expected to remain around the midpoint of 2% after the recent impact of rising oil prices on inflation has weakened. Given the excess capacity in the economy, the short-term rise in overall inflation is unlikely to significantly affect wage and price setting behavior. The committee pointed out that the monetary policy task requires it to ignore expected temporary inflation disturbances in a way that is consistent with the medium-term inflation target.

The economic outlook is facing short-term risks

The committee discussed the short-term risks to the economic outlook. The committee pointed out that although lower interest rates are expected to support the domestic economic recovery, the speed and timing of the recovery are still uncertain. Especially, recent revisions to GDP growth for the June and September quarters of 2024 indicate that the economic momentum is much weaker than previously measured. The committee pointed out that the tightening of international financial conditions poses a downside risk to global growth, especially for countries with high debt levels or implementing fixed exchange rate systems. The committee discussed the global asset market and the risk of stock price decline if high profit forecasts fail to materialize or if market participants reassess their risk appetite.

The risk of increased trade barriers and broader geo economic fragmentation

The committee discussed the risks posed by the increase in trade barriers. In the medium term, these trade barriers may further increase. Due to the uncertainty of the timing and scale of potential changes, they have not yet been included in our core forecast. Given that trade protection is being used to pursue economic and geopolitical goals, this uncertainty is further exacerbated.

An increase in trade barriers will lower global production capacity. As a small open economy, New Zealand cannot avoid being affected by these international developments. Monetary policy cannot offset the long-term negative supply side impact of increasing international trade barriers. More broadly, as geo economic fragmentation intensifies, global economic activity may be more susceptible to the impact of economic shocks.

The increase in trade restrictions may reduce New Zealand's economic activity. But the impact on inflation is still uncertain, as it depends on how trade disruptions are transmitted through the global economy. Such shocks may take time to manifest, providing the committee with flexibility to respond. Any monetary policy response will depend on the impact of trade restrictions on medium-term inflationary pressures.

The global economy is facing a series of structural challenges

The committee discussed the long-term structural challenges facing the economy of China and the wider region. In addition, the committee pointed out that geopolitical and climate related risks bring uncertainty in the medium term. There may be higher relative price volatility and unpredictability of overall inflation. The committee unanimously believes that consumer price inflation approaching the midpoint of the target range puts it in the best position to cope with any inflationary shocks.

The committee agrees to lower OCR

Due to the overall CPI inflation approaching the midpoint, core inflation indicators approaching the midpoint, stable corporate inflation expectations, and significant idle capacity in the economy, the committee agrees that further lowering OCR is appropriate. The committee believes that a 50 basis point reduction is in line with its task of maintaining low and stable inflation, while seeking to avoid unnecessary fluctuations in output, employment, interest rates, and exchange rates. If economic conditions continue to develop as expected, there is room for the committee to further lower OCR in 2025. On Wednesday, February 19th, the committee unanimously agreed to lower the official cash rate by 50 basis points to 3.75%.