Neil Sands
The Reserve Bank gave borrowers an early Christmas present today, axing the official cash rate (OCR) by 50 basis points to 4.25%, with the promise of more cuts early next year barring unforeseen shocks.
The move was widely expected on financial markets, with some pundits even talking up the prospect of a 75-basis point cut ahead of the announcement.
While that proved wide of the mark, the latest tweak means the Reserve Bank of New Zealand (RBNZ) has slashed the OCR 1.25 percentage points since August, when it kick started the first easing cycle in four years.
Governor Adrian Orr was optimistic the RBNZ would deliver a third consecutive 50-basis-point cut at its next OCR meeting in February, saying that was “consistent” with projections.
Orr conceded many Kiwis had been struggling with cost-of living pressures and said he hoped they had some “summer respite” now that price rises had been contained.
“We [the RBNZ] have been part responsible for that with the higher interest rate,” he said.
“You know inflation is evil – we’ve 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… over the next couple of months warm your cockles and please invest in places that raise the productive capacity of this beautiful country.”
The RBNZ is confident it finally has prices under control after data released last month showed the annual inflation rate in the year to September 30 was 2.2% – the lowest since March 2021and approaching the mid-point of the bank’s 1.0%3.0% target range.
Finance Minister Nicola Willis said īt showed New Zealand was headed in the right direction.
“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.
The RBNZ Monetary Policy Committee, which usually couches its language around future rate cuts in vague terms, was unusually forthright about the relief homeowners and businesses can expect in 2025.
“Inflation expectations are also close to target and core inflation is converging to the midpoint,” it said in a statement.
“If economic conditions continue to evolve as projected, the Committee expects to be able to lower the OCR further early next year.”
Economic growth remains flat, with gross domestic product falling 0.5% in the 12 months to June 30, leaving room for further cuts.
“Economic activity in New Zealand remains subdued and output continues to be below its potential,” the RBNZ statement said.
“With excess productive capacity in the economy, inflation pressures have eased.”
The RBNZ said economic growth was set to pick up in 2025, but warned the outlook was not rosy for everyone.
“Employment growth is expected to remain weak until mid-2025 and, for some, financial stress will take time to ease,” it said.
ASB estimates a “neutral” OCR setting is 3.0-4.0% by mid-2025, while ANZ expects the cash rate will reach a low of 3.5% in May.
Despite Orr’s remarks, ANZ said it still expected a 25 basis point cut in February, although 50 basis point was a possibility.
“As always, the speed and extent of easing will be highly data dependent, but that’s particularly true given there is such a long gap to the next meeting,” it said.
New Zealand’s downward OCR track contrasts with Australia, where the central bank is expected to hold the cash rate at 4.35% until at least March, despite data released Wednesday showing inflation at a three-year low of 2.1%.
Analysis of central bank forecasts by The Australian newspaper released Wednesday indicate living standards across the Tasman will take until 2026 to recover from falls over the past two years.
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