An economist says the Reserve Bank's aggressive 0.5% cut to the official cash rate (OCR) highlights how much work is needed to turn the economy around.
The monetary policy committee today reached consensus on the jumbo-sized 50-basis-point reduction, bringing the OCR down from 3% to 2.5%. The decision means the cash rate has plummeted from 5.5% to 2.5% in just over a year.
The Reserve Bank also signalled that it was "open" to further cuts in the medium-term.
Several bank economists, including those at ASB, Westpac and Kiwibank, had expected the 0.5% cut, while ANZ and BNZ economists had forecast a smaller 0.25% reduction.
The good news for borrowers at most banks was that fixed-term mortgage rates have already been falling over recent weeks in anticipation of further OCR cuts.
Why the Reserve Bank's rates call is beyond what some expected — watch on TVNZ+
The country's largest bank, ANZ, also cut several of its floating rates this afternoon.
Cotality chief property economist Kelvin Davidson said the "bigger, front-loaded 0.5% cut was probably seen as the least-regrets option, rather than a more 'wait and see approach' of only cutting by 0.25%".
"The immediate, direct housing market effects from today’s decision aren’t likely to be massive. After all, the banks had already been cutting their mortgage rates in advance, particularly for one-year fixed loans," he said.
"All in all, it’s taking a lot of work to get this economy turning around and today’s decision will hopefully be the ‘shock treatment’ required to get everyone back into gear.
"The recent green shoots we’ve been seeing should emerge fully in 2026, and as unemployment starts to drop again, it seems likely we’ll see house prices rise next year.
"But the debt-to-income ratio caps are one reason to be cautious about the size and speed of medium-term growth in property values."
The Government welcomed the cut today, saying it "remains focused on responsible economic management", while Labour said it showed the economy was in "crisis".
Just 3% of manufacturers surveyed expect economic conditions to improve. (Source: 1News)
More cuts still to come?
In its summary of notes from today's decision meeting on the rate, the committee wrote, "economic activity through the middle of 2025 was weak.
"In part, this reflects domestic constraints on the supply of goods and services in some industries, and the impact of global economic policy uncertainty.
"Household consumption is recovering, partly because of lower interest rates, and elevated commodity prices continue to support the primary sector."
But, "house prices are flat, and residential and business investment remain weak".
Additionally, the committee "remains open to further reductions in the OCR as required for inflation to settle sustainably near the 2% target midpoint in the medium term."
At its August update, the Reserve Bank lowered its projected floor for the OCR to 2.55%, but the bank was now signalling it is open to going further.
Govt welcomes cut, Labour says things going 'backwards'
Finance Minister Nicola Willis has welcomed today's cut to the OCR while Prime Minister Christopher Luxon said it was "positive news".
But Labour used the cut to slam the Government, saying the Reserve Bank was being "forced to clean up Luxon’s economic mess".
Willis said: "Today’s OCR shows monetary policy doing its job.
"The reduction will be welcome news to mortgage-holders and businesses, as OCR drops flow through to interest rates. Falling interest rates are good news for growth, jobs, and investment. It also means more money in the hands of families with mortgages.
"Today’s decision means the OCR has now dropped from 5.5% to 2.5% in just over a year - a significant shift that is taking some of the edge off a very challenging economic recovery."
She walked through the changes the coalition had made to the Reserve Bank's remit and to, in her words, "stop wasteful spending" — criticising the previous government.
"The Government acted swiftly to refocus the Reserve Bank on addressing inflation. Inflation has now been within the Reserve Bank’s target band of 1% to 3% for four consecutive quarters.
"We also stopped wasteful spending, which aside from squandering hard-earned tax dollars, also overheated the economy.
"But we know many New Zealanders are still doing it tough. That’s why the Government remains focused on responsible economic management that supports recovery while delivering the public services New Zealanders expect."
Labour's finance spokesperson Barbara Edmonds disagreed.
"Today’s OCR cut is good news for mortgage holders – but it’s also the Reserve Bank fixing the damage Christopher Luxon has done," she said.
"New Zealand’s economy is in crisis – and it’s Christopher Luxon’s fault. Businesses are closing in record numbers, jobs are being lost, and more Kiwis are leaving to find work overseas because he has no plan for growth.
"National lost all economic credibility. The economy is going backwards, and Christopher Luxon has no idea how to turn it around. He blames Trump’s tariffs or global conditions, yet other countries’ economies are growing while ours is shrinking.
"He will try to take credit for the OCR cut, but he doesn’t control it – and what he does control, he’s making a mess of."
She added: “Christopher Luxon made big promises on fixing the economy – but he’s making it worse. He is clearly not up to the job".
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