Reserve Bank slashes OCR by 0.5% to strengthen recovery

Wednesday, 8 October 2025

The Reserve Bank has cut the Official Cash Rate by 50 basis points, taking the key interest rate down to 2.5%, and economists are now entertaining the possibility of it falling as low as 2% in the coming months.

While economists had universally been expecting a rate cut, they had been divided on its likely size ahead of the 2pm announcement, with many expecting a smaller 25 basis point cut.

Foreign exchange traders reacted immediately, sending the New Zealand dollar down half a US cent to just under US57.5c within minutes of the announcement.

The cut comes amid indications business confidence took a big knock during the three months to the end of June, when Stats NZ has estimated economic activity contracted 0.9%, but also as inflation threatens to breach the central bank’s 1% to 3% target band.

The Reserve Bank noted inflation was around the top end of the band but said it expected it to return to “around the 2% target mid-point” over the first half of next year.

There was “significant spare capacity in the economy”, it said.

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The bank’s monetary policy committee discussed the alternative of a 25bp cut but in the end did not need to vote, instead reaching a consensus.

It appeared to signal the possibility of more than one further rate cut, by describing possible future moves in the plural.

“The committee remains open to further reductions in the OCR as required for inflation to settle sustainably near the 2% target mid-point in the medium term,” it said.

ANZ chief economist Sharon Zollner said the bank appeared to be giving itself maximum optionality.

Its “balanced messaging” left open the option of a pause, a 25bp or a 50bp cut at its next meeting in November, she said. But, overall, it could be best characterised as “front-loading the easing they forecast back in August, rather than signalling strongly that they believe they will need to do more”.

Capital Economics economist Marcel Thieliant noted the language around further reductions but said it expected the Reserve Bank to implement only one more 25bp cut, in November.

ASB chief economist Nick Tuffley also expected one further drop to an OCR rate of 2.25%, saying that should “underwrite economic recovery sufficiently”.

“But if it doesn’t, the Reserve Bank could potentially cut even further,” he agreed.

The size of the second-quarter drop in GDP was discussed by the Reserve Bank, but it appeared to play that down.

“The committee noted that an unusually large seasonal balancing item contributed to the weakness in the headline figure.

“This is expected to be reversed during the remainder of the year and is not assumed to have material implications for monetary policy,” it said.

Finance Minister Nicola Willis said the rate reduction would be welcome news to mortgage-holders and businesses.

“Today’s decision means the OCR has now dropped from 5.5% to 2.5% in just over a year — a significant shift that is taking some of the edge off a very challenging economic recovery,” she said.

Labour Party finance spokesperson Barbara Edmonds said the rate cut was a response to the economy being “in crisis”.

“National lost all economic credibility. The economy is going backwards, and Christopher Luxon has no idea how to turn it around,” she said.

Retail NZ described the cut as an “early Christmas present for retailers” voicing hope it would boost consumer confidence ahead of the peak Christmas shopping season.

Infometrics chief economist Gareth Kiernan said the rate cut was a sign the Reserve Bank had “lost patience with the economy’s failure to respond as expected to interest rate cuts over the last 14 months”.

“The move represents a clear effort from the bank to try and boost confidence, and thus consumption, investment, employment, and economic activity, by now directly stimulating the economy.”