The more aggressive track would have been better delivered three months ago, says bank
The Reserve Bank of New Zealand (RBNZ0 cut the Official Cash Rate (OCR) by 25 basis points to 3% yesterday, but the decision revealed deeper divisions within the central bank and painted a sobering picture of New Zealand's economic recovery.
In a surprising 4-2 vote split, two committee members pushed for a more aggressive 50 basis point cut. This clearly signals some genuine concern about the pace of economic momentum.
The dovish tone caught markets off guard. The RBNZ slashed its projected OCR track, now pointing toward a cash rate of 2.5% by year-end – well below what most economists had anticipated. This represents another 50 basis points of cuts likely to be delivered across the remaining two meetings this year.
Given the May MPS had one committee member voting in favour of a pause, yesterday’s vote signals a substantial turnaround in sentiment.
Mortgage market feels immediate impact
Following the announcement, two-year swap rates plunged below 3% to 2.94%, down from 3.1% beforehand.
“This is good news for indebted businesses and homeowning households,” Kiwibank chief economist Jarrod Kerr said.
“A drop in the cash rate to 2.5% should see the 2-year swap rate on a glide-path to 2.8%. We like it!”
Kiwibank has been vocal in advocating for more aggressive rate cuts for some time – and RBNZ is finally delivering, though Kerr said this latest cut would have been better delivered three months ago.
“We have been forecasting, praying and rain dancing for a 2.5% since late 2023,” he said. “We still are, with another two 25bps cuts to be delivered at each of the RBNZ’s remaining meetings this year.”
“Around a third of the mortgage book has repriced over the last 3 months onto rates that should have been lower,” he added. “The transmission is slower than it should have been.”
Business lending remains subdued
The Reserve Bank noted that business lending has been slow, despite credit being generally available. It also said that there is significant spare capacity in the economy off the back of increased unemployment and labour underutilisation.
Adrienne Begbie, managing director of Prospa, said that confidence often comes down to mindset as much as any tangible statistics. She says that rate cuts are also likely to have a positive impact on costs for small businesses, who often rely on personal equity to fund their business.
“A drop in the OCR is as much about mindset as it is about money for many small businesses,” Begbie said. “When the Reserve Bank signals a shift in direction, it can give business owners the psychological green light to start planning ahead and consider investing in growth.”
"Many small business owners use personal funds or home equity to support their operations, so a rate cut can have a dual impact through lower mortgage repayments at home and reduced borrowing costs for the business,” she adds. "That can free up hundreds of dollars a month, which might be the difference between treading water and hiring a new team member or boosting stock.”
Economic headwinds persist
The RBNZ's assessment reveals an economy struggling despite substantial monetary stimulus. GDP is expected to contract 0.3% in the current quarter, with unemployment rising to 5.3% by Q3 2025. The RBNZ describes economic momentum as having "softened" since summer, with global trade uncertainty and domestic weakness combining to create a challenging environment.
Inflation remains the one bright spot, despite it inching closer to the upper end of RBNZ’s target band of 3%.RBNZ still maintains confidence that price pressures will ease toward the 2% target by early 2026, despite the temporary spike expected this quarter.
The aggressive OCR track revision suggests the RBNZ recognises monetary policy must do the heavy lifting, particularly as fiscal policy tightens. With the neutral OCR estimated around 3.3%, today's 3% setting still isn't particularly stimulatory, explaining why markets now price in an 80% probability of reaching 2.5%.
