Tariffs are bringing economic downside risks, and the New Zealand central bank says there is room for further interest rate cuts.

On Wednesday, in Wellington, New Zealand, the Reserve Bank of New Zealands Monetary Policy Committee reduced the official cash rate by 25 basis points to 3.5%, a move that was in line with the expectations of 23 economists surveyed by Bloomberg. The Reserve Bank of New Zealands Monetary Policy Committee stated: "Recent increases in global trade barriers have weakened the global economic outlook. Overall, these changes have brought downside risks to New Zealand's economic activity and inflation outlook. As the impact and effects of tariff policy become clearer, the committee will have room to further lower the official cash rate." Due to concerns about a global economic slowdown triggered by US President Donald Trump's tariff policy, and the potential dampening of demand for New Zealand's export products, investors expect the Reserve Bank of New Zealand to need to lower the official cash rate to below the level implied in February, which was 3%. New Zealand Finance Minister Nicola Willis warned yesterday that the difficulty of New Zealand's recovery from an economic recession by 2024 will increase due to trade tariffs. Following the announcement of the interest rate decision, the New Zealand dollar rose slightly. Prior to this, the New Zealand dollar against the US dollar had briefly fallen below 0.55 US dollars for the first time in five years. The Reserve Bank of New Zealand pointed out: "The recent depreciation of the New Zealand dollar will help offset the direct impact of declining global demand for New Zealand's export products. Lower oil prices will also support domestic consumption and production." Financial markets show no signs of abnormalities The Monetary Policy Committee stated in the meeting minute that they had received briefings on financial market reactions to the tariff announcements. Despite significant price fluctuations in currency, stock, and bond markets, "there are currently no clear signs of abnormality in the financial markets." Today's decision by the Reserve Bank of New Zealand is an interim rate assessment, which means that the bank will not hold a press conference or release new forecasts. The Monetary Policy Committee is currently temporarily chaired by Governor Christian Hawkesby, who assumed the role after Adrian Orr suddenly resigned last month. Although today's 25 basis point rate cut marks a slow down in the pace of cuts after three consecutive 50 basis point cuts, the Reserve Bank of New Zealand has already lowered the official cash rate by a total of 200 basis points since August last year, making it one of the central banks with the most aggressive rate cuts among similar central banks. The Federal Reserve paused rate cuts after a total of 100 basis points of cuts in the last few months of 2024, and the Reserve Bank of Australia only made one 25 basis point rate cut and stated that they will proceed cautiously with further action. Within the six months leading up to September last year, New Zealand's gross domestic product shrank by 2.1%, and after experiencing a severe economic recession, the New Zealand economy recovered growth in the final quarter of 2024. The Reserve Bank of New Zealand had previously forecast a moderate economic recovery by 2025 and predicted that the current inflation rate of 2.2% would accelerate to the upper limit of the target range of 1%-3% before falling back. The bank had believed it was not necessary to lower the official cash rate below the neutral level of around 3% to stimulate the economy. However, concerns about a US and global economic recession caused by Trump's tariff policy have led to significant market volatility, which may have changed the aforementioned views. The Reserve Bank of New Zealand stated: "The majority of committee members believe that recent global policy changes have tilted the balance of medium-term inflation risks downwards for New Zealand. Other members pointed out that although uncertainty about the inflation outlook has increased, risks remain balanced at this stage." The Reserve Bank of New Zealand reiterated that economic growth is expected to be modest and stated that "despite the rapid unwinding of monetary tightening policy, household spending and residential investment remain subdued." The committee noted: "Previous cuts in the official cash rate have not yet had a comprehensive impact on the economy. Future policy decisions will depend on the outlook for medium-term inflation pressures."