(March 21): New Zealand’s economy unexpectedly contracted in the final three months of last year, confirming a recession, and sending the currency initially lower, as traders boosted bets on interest-rate cuts.

Gross domestic product (GDP) dropped 0.1% in the fourth quarter after declining 0.3% in the prior three months, government data showed on Thursday in Wellington. Economists had expected 0.1% growth. GDP shrank 0.3% from the year-earlier period, worse than estimates of nil growth.

The economy has tipped into a double-dip recession in the face of the Reserve Bank of New Zealand’s (RBNZ) aggressive monetary policy tightening, as it tries to bring inflation back under control. Weak growth is likely to increase pressure on policymakers to consider a pivot to cuts earlier than they had indicated.

The RBNZ has held the official cash rate (OCR) at 5.5% since May, and last month signalled that it didn’t intend to lower rates until 2025, citing record immigration and stubborn core inflation.

“The downward surprise for GDP tilts the balance in favour of OCR cuts coming sooner than the mid-2025 time frame,” said Nathaniel Keall, an economist at ASB Bank in Auckland. “We continue to expect cuts from the second half of 2024.”

Rate-cut bets rose after the report, with the yield on policy-sensitive two-year bonds down eight basis points to 4.52%, the lowest since Jan 16. The kiwi dollar also fell initially, extending the year’s decline to 4% before paring losses as the US currency dropped. It bought 60.88 US cents at 12.15pm in Wellington.

Pressure on New Zealand to consider easing policy comes as Federal Reserve (Fed) officials on Thursday maintained their outlook for three rate cuts this year, while on Tuesday, the Reserve Bank of Australia dropped its tightening bias.

Earlier this month, RBNZ chief economist Paul Conway said the bank may start cutting sooner than it currently expects if the Fed begins easing later this year, while the International Monetary Fund said on Wednesday that it sees scope for OCR rate cuts later this year.

Most economists are tipping a first OCR cut in the final months of 2024.

Just four of 16 economists surveyed by Bloomberg had anticipated a contraction, with the remainder tipping either growth or stagnation. The RBNZ had forecast GDP would be unchanged in the quarter.

The economy also shrank in the final quarter of 2022 and the first three months of 2023.

The main drivers of the fourth-quarter contraction were declines in manufacturing, retailing and machinery sales, the statistics agency said. Net exports increased, it said.

GDP per capita shrank 0.7% from the July-to-September period, its fifth straight quarterly decline.