New Zealand's central bank unexpectedly cut its benchmark cash rate by 25 basis points to 5.25%, the first reduction since March 2020, as inflation nears its target range of 1% to 3%. The move sent the kiwi dollar down 1%, and the central bank signaled further rate cuts may follow.

The decision surprised markets, with most economists expecting the Reserve Bank of New Zealand (RBNZ) to hold rates steady. The RBNZ cited weaker economic growth and eased inflation pressures as reasons for the cut and projected more reductions through to 2025.

In response, ASB Bank and others lowered mortgage rates, anticipating further easing. The RBNZ forecasted the cash rate to fall to 3.85% by the end of 2025, as New Zealand faces the prospect of a technical recession this year.

New Zealand joins other central banks that are following similar strategy of easing rates. The European Central Bank, Canada, Sweden and Switzerland have all cut interest rates, and an increasing number of analysts are now penciling in a half-a-percentage-point rate cut for the Fed's meeting next month.

New Zealand's neighbor Australia, however, is an exception as the Reserve Bank of Australia last week ruled out near-term rate cuts. The RBNZ minutes of the meeting, released alongside its statement, said the committee observed that the balance of risks had progressively shifted since its last monetary policy statement in May.

"With a broad range of indicators suggesting the economy is contracting faster than anticipated, the downside risks to output and employment that were highlighted in July have become more apparent," the minutes added. A global front-runner in withdrawing pandemic-era stimulus, the RBNZ lifted rates 525 basis points since October 2021 to curb inflation in the most aggressive tightening since the official cash rate was introduced in 1999.

New Zealand's annual inflation has come off recently hovering at 3.3%, with expectations that it will return to the central bank's target band in the third quarter of this year. The rate hikes have sharply slowed the economy, with meager first-quarter growth and recent data indicating a subdued momentum.