Neil Sands
The Reserve Bank continued to aggressively cut interest rates on Wednesday, axing the official cash rate (OCR) 50 basis points to 3.75% and flagging further reductions, though at a slightly slower pace.
The central bank’s third consecutive 50-basis cut was widely anticipated by financial markets on the back of remarks from Governor Adrian Orr last November and it resulted in lenders immediately lowering variable mortgage and business lending rates.
Orr was similarly candid in his comments after Wednesday’s announcement, saying the benchmark rate was set to fall a further 50 basis points by mid-year, probably in the form of two 25 basis point cuts.
“It doesn’t stop there, we have our projection of the OCR being around 3% by year’s end,” he told reporters.
If Orr’s prediction for the end of 2025 is correct, it will mean the Reserve Bank has chopped the OCR by 2.50 percentage points since August 2024, when it launched the first easing cycle in four years.
His forecast came with the usual central bank caveats pointing to potential risks, including the tariff hikes unveiled by US President Donald Trump.
“We’re in the middle of this geo-economic fragmentation,” Orr said.
“We don’t know what may happen with regard to tariffs, but we know it’s going to slow potential economic growth.”
But the bank’s overall outlook was upbeat, forecasting a recovery in economic growth and rising employment in the second half of the year.
While the bank warned a lower exchange rate and higher petrol prices could create inflation volatility in the near term, it said price rises were within its 1% to 3% target range, allowing it to maintain stability over the medium term.
“At the central bank, we target low and stable inflation. That’s the best and only thing we can do to maximise economic wellbeing,” Orr said.
“So it’s job done, or job continuing to be done by the central bank.
“Embedded in there are the good things that can happen once you’re in low and stable inflation. Economic growth will be picking up, employment growth will be picking up. That wouldn’t happen if high and variable inflation had remained.”
‘Beautiful world’
Orr said he would like to see the OCR remain around 3% for an extended period.
“That would be a beautiful world. In a world of no future shocks, nominal GDP growth would be running broadly at potential, interest rates would be broadly neutral and the exchange rate would be broadly fair value.
“That’s not too far from what this projection is by the end of the calendar year, all other things unchanged.”
Finance Minister Nicola Willis welcomed the move, saying business and consumer confidence were rising.
“This is good news for New Zealanders. A growing economy means more money in people’s pockets, more jobs and more opportunities,” she said.
“The government knows many families and businesses are doing it tough, but evidence is mounting that they can look forward to better times.”
Kiwibank chief economist Jarrod Kerr said the RBNZ’s forecasts were aligning with market expectations, giving a clearer picture of future rate movements.
“The RBNZ are signalling more cuts, sooner. The RBNZ has effectively matched market pricing and moved closer to our long-held view of a 3% terminal rate… We agree with the move, we’re all on the same page now.”
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