Is the OCR easing cycle over? Quite possibly

The Reserve Bank has cut the official cash rate by 25 basis points to 2.25% but signalled the easing cycle is probably over, with the focus now on watching how the economy responds to lower rates.

The widely expected cut was decided by a 5-1 vote from the Monetary Policy Committee, which noted that significant excess capacity remains in the economy but early signs of recovery are emerging.

Governor Christian Hawkesby (pictured) said lower interest rates are encouraging household spending, the labour market is stabilising, and the exchange rate has fallen, supporting exporters' earnings.

"We're not waiting for a recovery, it's happening right now through Q3 and Q4," Hawkesby said.

The decision is the final meeting for Hawkesby, who hands over to Dr Anna Breman on December 1.

OCR likely on hold through 2026

The RBNZ published a central projection showing the OCR on hold throughout 2026, with the track bottoming out at 2.2% in the second quarter before rising again in 2027.

Hawkesby said the slight downward tilt in the track is "just a nod to the likelihood that if the OCR was to change over the next 3-6 months, it would be more likely to go down than up".

"Further out, the chances are more likely to go up than down. But only time will tell," he added.

The RBNZ expects GDP to have risen by more than 1% over the final six months of this year, with calendar year growth accelerating to around 3% in 2026. Employment is thought to have troughed already, with the unemployment rate set to ease down to 5% over next year.

Annual inflation is sitting at 3%, the top of the RBNZ's 1-3% target band, but is expected to fall to around 2% by mid-2026 as spare capacity in the economy works through.

The RBNZ also dismissed concerns about the weak Q2 GDP figure, which showed a contraction. Hawkesby said the team had worked through the data in detail and saw many one-off factors including statistical quirks, seasonal factors and supply-side constraints.

"We think that activity was not as weak as the headline number suggested, though it was on the weak side. What we're seeing now is that economic indicators are picking up," he said.

That includes consumer spending and the labour market, with employment and hours worked both showing improvement.

Assistant governor Karen Silk said the RBNZ believes monetary policy is working and is confident about that.

"25 basis points takes time to work through, and it will," Silk said.

ASB: door not open as wide as expected

ASB chief economist Nick Tuffley said the RBNZ was more cautious than many expected, with the door for further easing open but not as wide as anticipated.

"The RBNZ will cut again if needed, but only if the economy looks set to underperform its latest forecasts. And the RBNZ's GDP, CPI and unemployment rate forecasts look reasonable for the next batch of outcomes," Tuffley said.

The Monetary Policy Committee debate centred around whether to cut at this point or remain on hold to see if the lagged impact of past cuts would be sufficient. The 5-1 vote showed a preference to buy extra insurance for an "enduring" recovery.

"The OCR track bottoms out at 2.2%, which hints at some chance of the need for a follow-up cut to meet the RBNZ's inflation objective but less than the market's 50:50 view heading in," Tuffley said.

ASB's base case remains that the RBNZ will keep the OCR on hold now at 2.25% and watch closely for various lagged stimuli to work through with more effect.

"We think the recovery is starting to gain enough traction and the RBNZ will be on hold from here. But the risk will remain skewed to a lower OCR for the time being," Tuffley said.

Housing market response

Cotality chief property economist Kelvin Davidson said today's rate cut may not make too much difference to the housing market, given many banks had already been lowering fixed mortgage rates in previous weeks.

"More generally, given lower financing costs and the prospect of a stronger economy in 2026, there's a solid case for thinking that property sales activity will continue to rise next year, which is also likely to lead to a degree of growth in house prices too," Davidson said.

The RBNZ predicts house price growth of about 4% in 2026, which Davidson says would be modest by past standards but consistent with debt-to-income ratio caps now in place.

When asked about house price trajectory, Hawkesby said the RBNZ's forecast for house prices is a moderate increase through time because they're a little bit above the measure of sustainable house prices.

"We think they'll grow roughly in line with income growth over the next few years. That's a good place to be," he said.

Hawkesby added the wealth effect through house prices hasn't been a strong channel this time around, but many other monetary policy channels have been working, including the cash flow channel with the lowering of mortgage rates.

On future OCR outlook, he said it will largely depend on how economic recovery and global factors evolve.

The 50-basis-point cut delivered in October was designed to mitigate the risk of households and businesses being excessively cautious. Hawkesby said the RBNZ is hoping that 2026 will have monetary policy be a bit less newsworthy.

As for borrowers wondering about fixed rates, Hawkesby directed those firmly towards qualified financial advisers.

“I’m not licensed!” he said.