RBNZ delivers 0.5% interest rate cut, more on the table

Wednesday, 19 February 2025

Prime Minister Christopher Luxon and Finance Minister Nicola Willis welcomed the Reserve Bank’s 50-point OCR cut.

The Reserve Bank has cut the official cash rate by 50 basis points to 3.75%, following through on the half-promise it made in November and cutting the rate to its lowest level since November 2022.

It also indicated it expected further rate cuts to come significantly faster than it had previously signalled, moving its predictions to meet those of the financial market.

The Reserve Bank in contrast made only small tweaks to its future forecasts for economic growth and inflation, and for unemployment which it still expects to peak at 5.2% during the first of this year — lower than many other economists predict.

BNZ, Westpac, ASB, Kiwibank and ANZ moved to cut their variable interest rates shortly after the announcement.

Finance Minister Nicola Willis told Parliament the Reserve Bank’s future track was consistent with the OCR falling by a further 50 basis points to 3.25% by the middle of the year, and to 3% by the end of the year.

The New Zealand dollar initially fell by 0.2% US cents to US56.8c in the wake of the monetary policy statement, indicating that financial markets viewed it as mildly dovish, though it regained all that ground later in the afternoon.

Kiwibank chief economist Jarrod Kerr said the main message from the Reserve Bank came from the further lowering of the forecasts for future interest rates.

“The OCR track implies a 25bp cut in April and in May to 3.25%.”

Reserve Bank governor Adrian Orr confirmed at an afternoon media conference that was a reasonable assumption.

“The track flatlines at ‘3.1%’ out to 2028. That's the Reserve Bank's way of saying there's a 60% chance they go from 3.25% to 3%,” Kerr said.

ASB chief economist Nick Tuffley said the track was “far more realistic” than the one the central bank forecast back in November.

Prime Minister Christopher Luxon this afternoon said the cut was “really positive news to see” and “good news” for Kiwis.

“This makes a big difference, it puts more money in the back pockets of home-owners and small business owners. So good news, good direction. We expect to continue to have a downward trajectory on interest rates.”

Willis told reporters the path forward was “more positive than it was in the last update”.

Reserve Bank Governor Adrian Orr fronted to explain the central bank’s decision to cut rates, and what it expects to see in terms of the economy.

“They have enough confidence in the inflation level that they are continuing to forecast interest rate reductions.”

The Reserve Bank said in its statement that the economy was expected to recover this year, but currently remained subdued.

“With spare productive capacity, domestic inflation pressures continue to ease. Price and wage setting behaviours are adapting to a low-inflation environment.”

In less positive comments, the bank warned that global economic growth was expected to remain subdued in the near term.

“Geopolitics, including uncertainty about trade barriers, is likely to weaken global growth,” it said.

It also expected business investment to continue to drop in the “near term” after a significant fall in the September quarter.

Orr was confident that was just a case of investment lagging an economic upturn.

“It takes a lot of certainty to go and invest in a plant or farm or whatever it is,” he said.

The bank said it had not incorporated the risk of trade barriers increasing much further into its central projection.

“An increase in trade restrictions is likely to reduce economic activity in New Zealand. But the effects on inflation are uncertain,” it said.

Inflation was also likely to be “volatile” in the near term, it said, due to a lower exchange rate and higher petrol prices.

It is forecasting inflation will rise from its current rate of 2.2% to reach about 2.7% in the September quarter.

But it emphasised it still expected it to remain within its 1% to 3% target band.

Fed Chair Jerome Powell says interest rates will stay unchanged as inflation remains ‘somewhat elevated’ and the job market stabilises. Investors look ahead to future cuts.

The ‘cost of living crisis’ was not over, Orr said.

“Inflation is low, but the price levels are still high. When you go into a shop, you're not going to get a discount because inflation is now 2%; you're just not going to have to pay significantly more in a year's time.”

Ahead of the announcement, banks had splintered on how much further the OCR was likely to fall in the current economic cycle, with ANZ’s forecast of just one more rate cut to 3.5% and BNZ’s “working assumption” of a 2.75% trough making up the extremes.

But ANZ amended its forecast to incorporate two further 25bp cuts and a 3% trough after the Reserve Bank’s statement.

BNZ research head Stephen Toplis warned last week that further rate cuts would not necessarily mean a bonanza for borrowers as markets had already priced-in aggressive rate cuts.

But Finance and Mortgage Advisers Association country manager Leigh Hodgetts advised borrowers who didn’t see a reduction in their repayments to ask their banks why.

“The general feeling across New Zealand is that there will be further rate cuts this year, and we are already seeing competition heating up between the banks,” she said.