The Reserve Bank of New Zealand Faces Third Internal Split in History as Two Members Support 'Double Rate Cut' to 2.75%
Backyard New Zealand, August 20 Report: The Reserve Bank of New Zealand's rate cut decision on August 19 was backed by intense internal debate. According to the minutes released by the central bank, the six-member Monetary Policy Committee was deeply divided over the extent of the rate cut, ultimately passing a 25 basis point cut by a narrow majority of 4-2, while the minority members supported a more aggressive 50 basis point cut. This marks the third time in the central bank's history that a vote has been split, and it is the most significant division to date. The committee even discussed three policy options: keeping the OCR unchanged at 3.25%, cutting it by 25 basis points to 3%, or cutting it by 50 basis points to 2.75%.
Central Bank Governor Christian Hawkesby effectively acknowledged at the subsequent press conference that the OCR is likely to fall to 2.5% by the end of the year, although he did not commit to a specific decision.
"Every decision of the Monetary Policy Committee is open, and no future dates have been decided," he stated. "Indeed, we have significantly downgraded our official cash rate forecast in the monetary policy statement document. This is mainly based on new information about the starting point of the New Zealand economy, which we observed as stagnant growth in the second quarter."
Hawkesby further explained: "This means that the idle capacity in the economy will persist longer, allowing us to maintain lower interest rates to support the economy and achieve appropriate domestic inflationary pressure. The forecast is for a drop to around 2.5% by the end of this year, which aligns with further rate cuts for the remainder of the year. Whether we reach this level sooner or later will depend on developments during this period."
Economic Outlook Worrisome
The central bank's shift to a more dovish stance is primarily due to concerns about the economic outlook. The bank stated that while it expects annual inflation (2.7% for the June quarter) to reach 3% by the end of the current (September) quarter, it also anticipates the economy to contract again in the June quarter.
The central bank expects inflation to fall rapidly, returning to around the 2% target midpoint by mid-2026.
BNZ Head of Research Stephen Toplis stated that given the "very dovish" statement from the central bank on Wednesday, BNZ economists now predict the OCR will drop to 2.5%.
"In addition to today's 25 basis point cut to 3.0%, we maintain that there will be a further 25 basis point cut in October. We now also expect the November statement to include a final 25 basis point cut, bringing the cash rate trajectory's low point to 2.5%. Our previous expectation was a low point of 2.75%, with downside risks," Toplis said.
New Zealand Dollar Drops Sharply
The central bank's dovish shift immediately triggered a strong market reaction. The New Zealand dollar fell by more than half a cent against the US dollar to 58.3 cents, while wholesale rates dropped rapidly, with the two-year swap rate falling by more than 10 basis points to below 3%.
Governor Position Application
Notably, during the press conference, Hawkesby was asked about the application process for the central bank governor position. Hawkesby was appointed as acting governor on March 5 after former governor Adrian Orr suddenly resigned and was formally appointed for six months while a five-year governor recruitment process is underway. The Finance Minister can extend Hawkesby's appointment by up to three months.
Hawkesby was reluctant to elaborate but did acknowledge that he had applied for the position. "I did take the time to tidy up my resume and submit an application, for what it's worth," he said.