People exit the Reserve Bank of New Zealand building in Wellington, New Zealand, September 24, 2025. REUTERS/Marty Melville

By Lucy Craymer

WELLINGTON (Reuters) -New Zealand's central bank slashed its benchmark rate by an aggressive 50 basis points on Wednesday, surprising some in the markets as policymakers signalled concerns about the frail state of the economy and kept the door open for further easing.

The New Zealand dollar and interest rate swaps tumbled in the wake of the move that took the official cash rate to 2.5%, as investors bet on more stimulus in the coming months to shore up demand and buffer the economy from rising global headwinds.

“The Committee reached consensus to reduce the official cash rate by 50 basis points to 2.5 percent,” the RBNZ said in its accompanying policy statement. “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 dovish stance will be a welcome relief for the New Zealand government and the country’s prime minister, Christopher Luxon, whose popularity has taken a sharp hit in recent months as the economic recovery he and his party campaigned on has failed to eventuate.

Luxon has said publicly he would like to see the cash rate lower to try and shake off the economic torpor, with households in a depressed mood as they fret about the rising cost of living and scarcity of jobs. The Taxpayers' Union-Curia Poll released earlier Wednesday found that the current government would not have enough seats to govern if an election was held today.

The RBNZ decision went against 15 of 26 economists surveyed in a Reuters poll who had forecast the Reserve Bank of New Zealand would cut the official cash rate by 25 basis points.

However, the larger cut wasn't totally unexpected as the remaining 11 economists had picked a 50-bp reduction and markets were primed for the RBNZ to pull harder on its monetary policy levers to inject impetus to a weakened economy.

The New Zealand dollar fell 0.90% to $0.5745, while two-year interest rate swaps fell to 2.5251% from 2.6194% before the decision.

“The RBNZ’s decision signals that the likelihood of inflation pressures being weaker than previously anticipated carried more weight than waiting to see how quickly the economy rebounds and what ripple effects come from the current spike in inflation,” ASB chief economist Nick Tuffley said in a note.

The central bank has cut rates by 300 basis points since August 2024, and with inflation within its target band of 1% to 3%, policymakers have leeway to lower borrowing costs further.

TRUMP POLICIES ADD TO ECONOMIC WOES

Wednesday's policy meeting is Christian Hawkesby’s second-to-last meeting as RBNZ Governor, after the government last month appointed Swedish policymaker Anna Breman to the role starting Dec. 1.

A global front-runner in withdrawing pandemic-era stimulus, the RBNZ lifted rates 525 basis points between October 2021 and September 2023 to curb inflation in the most aggressive tightening since the official cash rate was introduced in 1999.

The punishing borrowing costs, however, slammed the brakes on demand and tipped the economy into recession last year. Since then it has struggled to motor on, contracting by 0.9% in the second quarter in a shock result that fuelled bets of steeper rate cuts.

While trading partner growth has been resilient, it is expected to slow in part due to U.S. President Donald Trump's sweeping tariffs and the government’s tight fiscal policy, hurting business confidence and pushing up unemployment.

One challenge for the bank is that inflation ticked up to 2.7% in the second quarter and the central bank expects inflation to reach 3.0% in the third quarter.

However, in its statement on Wednesday, the RBNZ said spare capacity in the economy should see inflation return to near its mid-point in 2026.

New Zealand is one of several countries to ease rates as inflation has moved lower, but its sharp reductions to borrowing costs contrast with a more cautious approach by the U.S. Federal Reserve and its counterpart in Australia.

The Reserve Bank of Australia held the cash rate steady last week as it flagged inflation concerns. And last month, the Federal Reserve delivered its first rate cut for the year.

(Reporting by Lucy CraymerEditing by Shri Navaratnam)