New Zealand’s Reserve Bank has cut the official cash rate (OCR) by 50 basis points (bps) to 4.25 percent today and indicated a similar size cut will be announced after its next meeting in February.
The decision is in line with what most economists had predicted. It is the second consecutive 50 bps cut and third OCR reduction since August.
The Bank’s Governor, Adrian Orr, has warned mortgage holders not to expect too much from their banks, who are facing high international borrowing costs.
However, New Zealand’s major banks have responded positively, with ANZ, BNZ, Kiwibank, Westpac, and Co-operative Bank all announcing reductions. Those who didn’t pass on the full rate cut said they were protecting savers.
An indicative forecast in the Monetary Policy Statement suggested a slower rate of cuts next year, with the OCR falling to around 3.5 percent by the end of 2025.
The forecast endpoint for the OCR was also lifted a little to 3.06 percent, up from the previous 2.98 percent.
Prime Minister Christopher Luxon was quick to claim credit for the government, saying it was thanks to its austerity measures for the recent fall inflation.
But Orr politely demurred, saying, “Success has thousands of parents, I’m very pleased to no longer be an orphan.”
He also said it was time for the banks to do their bit to reduce mortgage pressures, by increasing their margins from the present 2.4 percent towards the long-term average.
Economic Recovery to Be Slower Than Predicted
While New Zealanders heading into Christmas shopping season—and retailers who are pinning their hopes for survival on a festive spend-up—will be pleased with the news, the reasons behind the Bank’s decision should temper that optimism.The Reserve Bank is projecting a marginally better GDP result for the March 2025 year—minus 0.1 percent rather than minus 0.4 percent—but its longer-term forecast is bleak.
While the economy is still predicted to return to growth by 2026, it’s now likely to be at 2 percent rather than the previous forecast of 2.7 percent, and just 2.4 percent in 2027, well down on the previously predicted 3.2 percent.
Orr said that global economic growth was expected to remain subdued in the near term, while geopolitical tensions and “general policy uncertainty could contribute to economic and inflation variability, volatility over the medium term.”
Aside from wars in Ukraine and the Middle East and increasing uncertainty over China’s economy, the Bank will also be concerned about U.S. President-elect Donald Trump’s tariff policies.
“The Monetary Policy Committee agreed that having consumer price inflation close to the endpoint of its target ban puts us in the best position to respond to any shocks to inflation, looking forward,” he said, or in other words, if things go bad, the Bank would have plenty of room to raise rates again.
‘Warm Your Cockles’: Orr
Orr finished his speech by acknowledging that New Zealand had been through tough times.“We’ve been partly responsible for that with the higher interest rate, and you know inflation is evil,” he said.
“We have been making sure we can squeeze it out of the economy. I know it’s been challenging for many, many people and will continue to be so over coming months.”
He said he hoped people got some “summer respite from the challenge.”
“Warm your cockles and please invest in places that raise the productive capacity of this beautiful country,” he said—a somewhat cryptic exhortation that has left many puzzled as to its exact meaning.
Finance Minister Nicola Willis said the rate cut was “good news for families and businesses, both directly and indirectly.”
“The drop means many everyday Kiwis can focus more on what matters most to them, and less on making the next mortgage repayment or whether their card will decline at the supermarket,” she said, promising that government policies would remain focused on the economy and cutting public sector spending.
“The steps the government has taken to carefully prioritise government spending, invest in frontline services, reduce red tape, and restore confidence in the economy are having an impact,” Willis said. “We are headed in the right direction.”
