Mahvash Ikram
The Official Cash Rate (OCR) is now at its lowest level in three years after the Reserve Bank on Wednesday cut the bank rate by 25 basis points to 2.25% and signalled that it would likely hold the OCR steady while monitoring inflation as it drifts back towards the 2% target mid-next year.
Reserve Bank Governor Christian Hawkesby
Speaking at a press conference following the release of the November Monetary Policy Statement, Governor Christian Hawkesby said inflation had increased to 3% in the September quarter but remained on track to return to the 2% midpoint, supported by spare capacity in the economy and monetary policy that is now “supportive and stimulatory”.
Hawkesby said economic activity had started picking up mid-year thanks to lower rates that encouraged household spending, stabilised the labour market and lowered the exchange rate which boosted export earnings. Strong AI-related investment globally had also helped the economy, although the bank expects international conditions to soften as trade barriers bite.
Easing cycle near end
Hawkesby indicated the Reserve Bank had reached the end of its easing phase, with the Monetary Committee’s OCR track pointing to a prolonged hold on interest rates with little appetite for further cuts unless the economic outlook deteriorates.
“We have published a central projection ….that would be consistent with the Official Cash Rate being on hold through the course of 2026,” he said.
The new track includes “a very slight downward tilt”, reaching a low of roughly 2.2%, which Hawkesby described as a “nod to the likelihood that if the OCR were to change over the next three to six months, it might be more likely to go down than up. And then further out in that projection, chances are more likely to go up than down.”
Many economists are picking that interest rate will begin to rise again in 2027 as the economy strengthens.
Hawkesby cautioned against reading the projection as a commitment to further cuts in the OCR. “Only time will tell,” he said, noting that global trends could change the approach.
He said the committee wanted to see how the economy evolved, after a year of volatility and weak data. While the easing cycle had been extensive, the Reserve Bank now viewed itself as appropriately positioned – sufficiently stimulatory to support demand, but with room to adjust if conditions shift.
Recovery under way
Hawkesby said the weak GDP figure of the second quarter was down to a number of one-off factors that included statistical quirks, seasonal issues and supply-side constraints.
But high-frequency indicators (such as card spending, online job vacancies, freight and shipping volumes, data from payroll providers, new mortgage applications and housing market listings) were now showing momentum.
“We’re seeing it through consumer spending picking up, we’re seeing signs of the labour market stabilising … a whole host of small indicators that collectively give us that confidence that we’re not waiting for a recovery. It’s happening right now through Q3 and Q4.”
Assistant Governor Karen Silk added that earlier rate cuts would take time to work through the economy. The Reserve Bank remained very confident that monetary policy was “transmitting effectively”, she said.
House prices
The bank expects house prices to rise gradually.
“Our forecast … is for a moderate increase through time,” Hawkesby said. Prices were “a little bit above our measure of sustainable house prices” but would grow roughly in line with income growth over the next few years.
With the OCR now below the bank’s neutral-rate range of 2.5% to 3.5%, Hawkesby said the Reserve Bank was hoping to boost acitivity.
“We do think it’s supportive and stimulatory … part of that story of why we think we’ll see the uptick in activity from here.”
Global risks
Hawkesby warned that geopolitical uncertainty would continue to frame the committee’s decisions.
“We’re programmed to worry about the global outlook,” he said, citing risks around AI investment not materialising, fiscal dynamics pushing up inflation globally and erosion of central-bank independence overseas.
Still, he argued the committee had regained confidence after a year of volatility. Inflation expectations were easing and inflation was likely to fall from 3% to around 2.7% and then to around 2% by the middle of next year.
This week was Hawkesby’s final OCR announcement as governor. His successor, Anna Breman, takes over on 1 December.
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