“The Committee reached consensus to reduce the official cash rate by 50 basis points to 2.5 %,” the Reserve Bank of New Zealand 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 business confidence worsening and 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.

Finance Minister Nicola Willis said the rate cut is good news for growth, jobs and investment, adding: “We know many New Zealanders are still doing it tough.” The RBNZ decision went against 15 of 26 economists surveyed in a Reuters poll who had forecast it would cut the cash rate (NZINTR=ECI), opens new tab 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 tumbled to six-month lows, losing 0.90% to $0.5745, while two-year interest rate swaps fell to 2.5251% from 2.6194% before the decision. The market is now fully pricing in a further 25-basis-point cut to 2.25%, and is ascribing a 60% chance of a 2.00% terminal cash rate.

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, opens new tab 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 central bank is that inflation is expected 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.

Zoe Wallis, investment strategist at brokerage Forsyth, is retaining her terminal rate forecast at 2.25% for now. However, she said “there is a chance that further easing beyond that level could be on the cards if inflation proves well contained and the economy fails to fire up convincingly in coming months.”

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