OCR drops to 4.25% - but is it the right move?

Wednesday, 27 November 2024

The Reserve Bank has dropped the Official Cash Rate by 50 basis points in the final review of the year.

The OCR is now 4.25% down from 5.5% at the start of 2024.

The next review is in February 2025.

The Reserve Bank of New Zealand has lowered the Official Cash Rate by 50 basis points to 4.25% - so what does that mean for you?

The Reserve Bank’s (RBNZ) Monetary Policy Committee agreed a cut was needed for the final announcement of the year on Wednesday afternoon, which saw the OCR drop from 4.75%.

The OCR is used to maintain price stability. To keep prices stable, the Government had an inflation target between 1% and 3% with a strong focus on the 2% midpoint. By increasing the OCR, this increases interest rates and helps bring inflation down.

The 50bp decrease in the rate was the third drop since August, meaning the rate had fallen 125bp in that time as inflation came under control with it dropping to 2.2% in Quarter 3.

The 50bp cut was widely expected by economists thanks to almost reaching that inflation midpoint. Unemployment is also rising, migration net inflows continue to drop as new arrivals abate and departures remain high and the housing market remains muted.

Finance Minister Nicola Willis said the cut was good news for families and businesses – both directly and indirectly.

“To give one example, a family with a $500,000 mortgage on a 25-year term could expect to be about $180 a fortnight better off than it was a few months ago, if its rate dropped from 7 to 5.75 per cent,” she said.

“Of course, the impact will depend on the size of those mortgages and whether they are floating or fixed, as well as what their current rates are.

“The drop means many everyday Kiwis can focus more on what matters most to them, and less on making the next mortgage repayment or whether their card will decline at the supermarket.”

In the lead up to the announcement some major banks had begun cutting home loan interest rates and Kiwibank, ASB, BNZ and ANZ again immediately cut their rates following the announcement.

Kiwibank chief economist Jarrod Kerr said the Reserve Bank delivered on expectations.

“There was no discussion of a 75bp move and a 25bp move. So the decision was pretty straightforward. Anything other than a 50bp would have been a shock, and hard to explain,” he said.

But he said he believed the Reserve Bank was moving in the wrong direction.

He said today’s cut was the “tip of the iceberg” as the RBNZ’s OCR track, which provided guidance on future policy moves, was lowered and pulled forward, which he said it had to be.

“But the endpoint was lifted a little to 3.06% from 2.98%. That’s bang on the 3.1% rate implied in wholesale rates.”

“The RBNZ is more comfortable than we are in the economic scarring inflicted and recovery. We think we RBNZ may be moving in the wrong direction, as they did in May. Time will tell. And we have a lot of time until their next decision in February.”

CoreLogic NZ chief property economist Kelvin Davidson said the cut was good news for mortgage borrowers who had stayed floating or fixed short term.

“The clear guidance about further OCR cuts might also bring back some confidence to existing owner occupiers looking to relocate, alongside the already decent activity from first home buyers and early return of investors,” he said.

“Indeed, history suggests that the falls in mortgage rates we’ve already seen could bring the recent downturn in property values to an end pretty soon. But that doesn’t necessarily mean a sharp upturn will start straight away either.

“An ‘overhang’ of listings, rising unemployment, and the looming prospect of the debt to income ratio rules becoming more of a factor all suggest any housing upturn in 2025 could stay fairly muted.”

Money Sweetspot co-founder and chief executive, Sasha Lockley, said although the cut would bring financial relief, many New Zealanders were still grappling with significant challenges.

“For the stretched majority, this relief will take time to filter through. It’s pleasing to see some proactive reductions in mortgage rates that we hope will continue in the coming months, but rising unemployment and increasing arrears remain pressing concerns across the nation.”

Infometrics chief forecaster Gareth Kiernan said the Bank had opened the door for another possible 50-point cut in February, although its OCR forecasts suggest that a 25-point cut then is still a realistic possibility as well.

“We’d suggest a 25-point cut in February is the most likely outcome at the next review, but there’s a lot of time and data to come before then. Financial markets might look at the Bank’s latest OCR forecast track and drive swap rates lower, which could see a bit more of a fall in fixed mortgage rates.”