The Reserve Bank has made its call
RBNZ has slashed the Official Cash Rate by 50 basis points to 2.5%, delivering one of its largest cuts since the easing cycle began and signalling more reductions could be on the way.
The Monetary Policy Committee reached consensus on the aggressive move, which takes the OCR to its lowest level in over three years.
The decision comes despite annual inflation sitting near the top of the RBNZ's 1-3 percent target band, with the committee prioritising economic recovery over near-term price pressures.
RBNZ Governor Christian Hawkesby said spare capacity in the economy meant inflation was expected to return to around the 2 percent target mid-point over the first half of 2026.
Weak economy drives decision
The committee noted that economic activity through the middle of 2025 was weak, with GDP contracting in the second quarter by considerably more than expected.
However, RBNZ said an unusually large seasonal balancing item contributed to the weakness and was expected to reverse during the remainder of the year.
More timely indicators suggest economic activity recovered modestly in the September quarter, though significant spare capacity remains in the New Zealand economy.
The committee discussed whether to cut by 25 or 50 basis points, with members split on the appropriate pace of easing.
Those favouring the larger cut emphasised prolonged spare capacity and the risk that excess caution by households and businesses could dampen consumption and investment more than currently assumed.
"A larger reduction in the OCR could mitigate this risk by providing a clear signal that supports consumption and investment," RBNZ said.
Those preferring a smaller cut highlighted that past OCR reductions continue to transmit through the economy, with signs of recovery in consumption and employment growth emerging.
Door open for further cuts
Notably, RBNZ has left the door wide open for additional rate cuts.
"The Committee remains open to further reductions in the OCR as required for inflation to settle sustainably near the 2 percent target mid-point in the medium term," it said.
The OCR has now fallen 300 basis points from its peak of 5.5 percent in August 2024, with wholesale interest rates falling since the August statement and resulting in lower rates on business lending, mortgage lending and term deposits.
The average interest rate on existing mortgages is expected to continue declining over the coming year as mortgage holders refix onto lower rates, reducing debt servicing costs for households.
House prices remain flat, and residential and business investment remain weak, though lower interest rates are supporting a recovery in consumption.
The decision will pile pressure on banks to pass on relief to mortgage holders, with RBNZ expecting construction activity to recover from mid-2026 as demand for dwellings picks up and house price growth resumes.
