PHOTO: Adrian Orr is a New Zealand economist and current Governor of the Reserve Bank of New Zealand. FILE
As the country’s top monetary policy officials prepare to meet this week, economists and financial markets are almost certain of a dramatic 50-point cut to the Official Cash Rate (OCR). This anticipated move by the Reserve Bank of New Zealand (RBNZ) will bring the OCR down to 3.75 percent, marking the third consecutive jumbo-sized rate cut.
A Reuters poll of 33 economists revealed that 32 of them expect the RBNZ to slash the OCR by 50 basis points on Wednesday. This cut is seen as a response to weaker inflation and increased spare capacity in the economy.
For households and businesses, a significant rate cut will bring welcome relief by lowering interest rate burdens and potentially boosting sales. However, the outlook beyond February remains uncertain.
Economists Weigh In
ASB Chief Economist Nick Tuffley predicts that the RBNZ will cut by 25 basis points at each of the following two meetings in April and May. “Our base case is the RBNZ will cut by 25bp at each of the following two meetings. We assume events will keep the RBNZ comfortable that inflation will remain contained. The risks appear roughly balanced between spacing OCR moves out or delivering yet another 50bp. But events will matter,” Tuffley said.
Tuffley also noted that the RBNZ’s easing cycle is nearing its end, with the decline in long-term wholesale interest rates stalling. “The risks are no longer one-sided: the RBNZ might not cut the OCR as far as markets already anticipate, and Donald Trump has at times pushed interest rates up,” he added, referring to the president’s trade policies.
Another factor is the number of borrowers who have fixed short-term in anticipation of falling interest rates. “The sheer volume of people looking to fix their mortgage rate soon could push interest rates higher if everyone tries to run for the door at once and puts pressure on the wholesale rates that banks rely on for hedging,” Tuffley explained.
Dramatic 50-Point OCR Cut Incoming: What It Means for Mortgage Rates in New Zealand
ANZ and Kiwibank Predictions
ANZ, the country’s biggest bank, forecasts one more cut after this week’s 50-point cut—a 25 basis point cut in April to bring the OCR to 3.5 percent. “In any case, we expect the RBNZ to start to tread more carefully now the OCR is approaching the RBNZ’s range of estimates for neutral (2.5-3.5 percent). Barring significant downward data surprises, this is very likely to be the last outsized cut,” said Chief Economist Sharon Zollner.
Financial markets, however, expect the OCR to fall to 3 percent in the third quarter. Kiwibank’s expectations differ from the RBNZ’s recent OCR track, which forecasted a 3.5 percent cash rate by the end of the year and a 3 percent rate by 2027. Kiwibank Chief Economist Jarrod Kerr believes that with the 2 percent target inflation rate virtually achieved, the RBNZ needs to put policy into neutral.
“We’ve disagreed with the track from its very inception. With the 2 percent target inflation rate virtually achieved, we believe the RBNZ needs to take their hand off the handbrake and put policy into neutral,” Kerr said. “We think a total of 125 basis points this year, to get us to 3 percent, is needed… with risk of more.”
The Impact on Mortgage Holders
The anticipated OCR cut and subsequent rate cuts are of significant interest to homeowners, who collectively have around $370 billion worth of outstanding mortgages. Many mortgage holders have been fixing for shorter terms in anticipation of OCR reductions, resulting in about 55 percent (over $200 billion) of the total mortgage pile being either on floating rates or due to be re-fixed in the first six months of 2025.
With over 82 percent of the entire mortgage stock set to have a reset of interest rates this year, the interest costs paid by homeowners will change rapidly following any rate adjustments by the banks.
As the RBNZ prepares to announce its decision on the OCR, the weight of expectations is palpable. The potential 50-point cut this week could provide much-needed relief to households and businesses, but the outlook for future rate cuts remains uncertain. Economists and market watchers will be closely monitoring the RBNZ’s next moves to gauge the direction of New Zealand’s monetary policy.