The Reserve Bank of New Zealand (RBNZ) has just dropped the Official Cash Rate (OCR) to 4.25%, down from 4.75%. This marks a total cut of 125 basis points since August, when the OCR stood at a peak of 5.50%. Here’s how this affects the economy, your mortgage, and what’s ahead:
1. Why the OCR Drop Matters
The OCR directly influences mortgage and deposit rates, and banks are already adjusting their numbers. For instance:
- Mortgage rates peaked at 6.4% but are now expected to decline to 5.8% over the next year.
- Lower rates mean potential relief for borrowers as they refix mortgages at more affordable levels.
What’s next? Expect more banks to follow suit in trimming their rates.
2. A ‘Hawkish’ Surprise
Despite the cuts, analysts described the RBNZ’s tone as “hawkish”, meaning they’re still cautious about easing monetary policy. Here’s why:
- The latest Monetary Policy Statement suggests smaller OCR cuts ahead, with a projected OCR of 3.5% by the end of 2025.
- By December 2027, the OCR might hover slightly above 3%, signaling a more measured approach to rate reductions.
Senior market experts warn this could signal slower-than-expected economic recovery.
3. Inflation is Cooling Off
The Consumers Price Index (CPI) has dropped to 2.2% for September, aligning with the RBNZ’s target of 1%-3%. Key drivers include:
- Declining import prices.
- Wage growth slowing down.
- Spare productive capacity in the economy easing price pressures.
Good news for consumers: Inflation is stabilising, helping restore purchasing power.
4. Challenges Ahead for Economic Recovery
While the OCR drop supports a recovering economy, the pace remains uncertain:
- Domestic growth: Expected to pick up by late 2025, but significant productive capacity is unused.
- Labour market: Employment growth is weak, and unemployment is rising, reflecting the delayed recovery of the job market.
- Global factors: Subdued growth in major economies like the US and China adds to the uncertainty.
The RBNZ is confident in its approach but notes risks like geopolitical issues and climate-driven price shocks.
What Does This Mean for You?
For households and businesses:
- Lower OCR = lower mortgage rates, offering relief for borrowers.
- Financial stress remains for some, but banks are well-capitalised to support those in need.
For the broader economy:
- The easing of monetary policy is expected to encourage investment and spending in 2025.
- Inflation volatility could still pose challenges in the medium term.
Looking Ahead: 2025 and Beyond
The RBNZ has set its sights on creating a sustainable recovery:
- Expect more OCR cuts next year, starting with a likely 25bp reduction in February.
- Long-term projections aim for stability, with inflation staying within target and growth rebounding.
Stay tuned! February’s decision will set the stage for the next chapter in New Zealand’s economic journey.
What do you think of the OCR cut? Will it make a difference to your mortgage or financial plans?
Source: interest.co.nz
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