Reserve Bank drops official cash rate to 5.25%

Wednesday, 14 August 2024

The Reserve Bank has cut the official cash rate for the first time in years, reducing it to 5.25%.

The rate cut of 25 basis points came as the bank said consumer price inflation was returning to within its guideline target band of 1-3%.

“Surveyed inflation expectations, firms’ pricing behaviour, headline inflation, and a variety of core inflation measures are moving consistent with low and stable inflation,” the bank said in a statement.

“Services inflation remains elevated but is also expected to continue to decline, both at home and abroad, in line with increased spare economic capacity. Consumer price inflation in New Zealand is expected to remain near the target mid-point over the foreseeable future.”

Speaking to media at the Reserve Bank press conference, Governor Adrian Orr said the New Zealand economy had been through a difficult period.

“The darkest period is where we are right now,” he said, reflecting on the heightened OCR rate in place following the Covid-19 pandemic, peaking at 5.5% and staying there since May 2023.

However he outlined the reasons for the rate cut: “Our recent announcements have talked about the [Monetary Policy] committee’s growing confidence that rising spare capacity in the economy and changing price setting behaviours would reduce inflation and enable the future easing in monetary conditions - and it is here today that I can say that this confidence has now reached that point where the committee has been able to act,” he said.

Banks drop loan, deposit rates

Reaction to the OCR drop was immediate, with Kiwibank and ASB dropping their home lending rates by 25 basis points.

“In the current high interest rate environment, we understand that any decrease in lending rates can lead to meaningful savings on loans and mortgages, enhancing affordability and financial flexibility for our customers”, Kiwibank’s chief customer officer - business, Elliot Smith, said.

ASB’s general manager wealth, insurance and partnerships, Jax Mitchell, said that the rate reduction - and subsequent rate drops by the bank would be welcome relief for many New Zealanders.

ANZ announced it was dropping some home loan rates by 10 basis points following the cut. The reduction followed a 15 basis point drop two weeks ago, Grant Knuckey, ANZ NZ managing director for personal, said.

“While this is a welcome signal that inflation is under control, it also means the economy has softened,' Knuckey said.

“We’re conscious that interest rates for borrowers remain high and this is placing continued strain on household budgets. For businesses that means the environment remains really challenging.”

Knuckey said the market had priced in a lot of easing over the next year. “The New Zealand economy is still doing it tough and global markets remain volatile. But for the average borrower we do expect conditions to improve from here.”

Westpac joined the other banks with a 25 basis point cut across a number of loans and deposit rates.

“We’ll continue to look for opportunities to pass on interest rate reductions to ensure we’re providing customers with good value in a competitive environment,” General Manager of Product, Sustainability and Marketing Sarah Hearn said.

Cut will ‘take time’ to affect rents

The “small cut” was welcomed by the NZ Property Investors’ Federation, however they said the move would take time to impact rents.

“Today’s small cut will take time to work through the system as many property investors are on fixed rate mortgages. However, it is a sign that inflation has been beaten, and it will encourage investors struggling with high costs to stay in the business.

“Better still, it will encourage investors who have been holding off buying new properties to get back into the market, increasing the number of properties available for rent,” spokesperson Matt Ball said.

Retailers hope for a return in consumer confidence

Retailers also welcomed the cut, saying they hoped it would lead to a return in consumer confidence.

“We are hopeful that this announcement today will turn around consumer confidence, which has been at prolonged low levels over the last couple of years, which in turn will help retailers, who have been suffering a continued downturn in sales,” Retail NZ chief executive Carolyn Young said.

“It’s welcome news for the wider economy and hopefully we will see an uptick before Christmas.”

‘A start on the pathway to lower interest rates’

Prime Minister Christopher Luxon said the drop in inflation was assisted by the Government’s policies.

“Inflation is now tracking down fast. Down to 3.3% from 7.3% which is the lowest in three years, and food prices as you will know have fallen in annual terms for the first time in six years.

“As a consequence of that falling inflation it was encouraging to see today the Reserve Bank announce a 25 basis point reduction in the official cash rate to 5.25%. It has also been good to see the retail banks respond immediately today to the Reserve Bank's decision by lowering their own interest rates that they offer their customers.

“This is a start on a pathway to lower interest rates that will help family and farm budgets that have been under immense pressure,” Luxon said.

Joining Luxon, Finance Minister Nicola Willis said “coupled with our tax relief package we are now at a turning point”.

“The Reserve Bank’s decision shows it now has confidence inflation is under control.”

First cut in years

The Official Cash Rate has been at 5.5% since 24 May 2023.

There have been eight “no change” decisions since from the Reserve Bank’s Monetary Policy Committee, who reviews the OCR seven times a year.

The rate rose steeply in 2022, following the first increase from 0.25 basis points in October 2021, when it was lifted to 0.50. Prior to this the rate had been at 0.25 since March 2020.

The next time the bank will review the OCR is on 9 October.