MNI RBNZ WATCH: MPC Strengthens Easing Bias With 50bp Cut

The Reserve Bank of New Zealand’s Monetary Policy Committee cut the Official Cash Rate by 50 basis points to 2.5% on Wednesday, strengthening its easing bias and citing persistent spare capacity as a downside risk to activity and inflation.

The cut, which brought the OCR to its lowest level since July 2022 with 300bp of cumulative easing since August 2024, was largely expected, though markets had only priced about a 50% chance of a reduction by 50 rather than 25bp. (See MNI RBNZ WATCH: MPC To Cut, Eyes 50 Basis Points)

The MPC said it discussed a 25bp adjustment before reaching consensus on the half-point move. “The Committee remains open to further reductions in the OCR as required for inflation to settle sustainably near the 2% target mid-point in the medium term,” the statement said.

RBNZ-dated swaps fell 9-15bp across meetings as markets reacted to the dovish tone, with total easing priced by November rising from 62bp to 75bp including Wednesday’s cut. Markets have now fully priced in a 25bp cut at the Nov 26 meeting. 

The MPC’s tone marked a shift from August’, when it cut by 25bp and stressed that future decisions would depend on data. (See MNI RBNZ WATCH: MPC Makes Dovish 25BP Cut, Eyes 2.5% OCR)

SPARE CAPACITY FOCUS

While inflation remains near the top of the target band, the MPC said spare capacity was consistent with the headline gauge returning toward the 2% mid-point in the first half of 2026.

The Bank acknowledged that Q2 GDP data, which printed 60bp lower than expected at -0.9%, was driven by one-off supply-driven factors, and noted that subdued momentum into Q3 suggest spare capacity remains significant and may persist longer than expected.

“The Committee has revised its assessment of current spare capacity only marginally in response to new GDP and activity data, but note that the new data imply some downside risk,” The MPC noted. “More timely indicators suggest that economic activity recovered modestly in the September quarter, but there remains significant spare capacity in the New Zealand economy."

The MPC also pointed to potential supply constraints which may be overstating recent weakness in agriculture and manufacturing.

The RBNZ will closely watch the Q3 CPI, due Oct 20, which it expects at 3.0%, and the Q3 labour market report on Nov 5, which the August statement forecast to show a 5.3% unemployment rate, ahead of its next and last meeting for 2025.