File image. Governor Christian Hawkesby. Source: RBNZ, Pound Sterling Live.
This massive reduction in New Zealand interest rates was not expected and the central bank is "open to further reductions".
The pound has risen to its highest level against the NZ dollar since April as GBP/NZD hit 2.3353 after the Reserve Bank of New Zealand lowered interest rates by 50 basis points.
Ahead of the decision, the market was fully priced for a 25 bp cut but saw only a 44% chance of a larger 50bp outcome, which means traders were not positioned for this eventuality.
The subsequent adjustment requires lower Kiwi bond yields (as investors buy said bonds) and a weaker NZ dollar.
The currency is lower against all its G10 peers, signifying broad underperformance, with NZD/USD down nearly a per cent on the day at 0.5742. EUR/NZD is higher by 0.60% at 2.0228.
The RBNZ said the bumper cut was necessary as "there is significant spare capacity in the domestic economy" meaning it thinks lower rates can help businesses and households achieve their full potential.
Committee members appear to have been particularly concerned by the contraction in GDP in the second quarter of 2025, "which was considerably larger than expected."
Concerning the outlook, the RBNZ also indicated the potential for further reductions in the base rate.
Economists at local bank ASB think New Zealand inflation will fall toward the bottom of the RBNZ's 1‑3% target range due to the significant amount of spare capacity in the economy.
They expect another 25bp cut in November to bring monetary conditions into more stimulatory territory, which hints at this potentially being a resting place for the cutting cycle.
However, "there is a potential for this to go lower if the economic recovery doesn't lift off," says Nick Tuffley, Chief Economist at ASB.
"We continue to expect a further move to 2.25% in November. And we’re keeping an eye on a potential move to 2% in February," says Jarrod Kerr, Chief Economist at Kiwibank.
With further rate reductions ahead, the NZD could see the current run of softness extend, resulting in multi-year highs for GBP/NZD and EUR/NZD.