Reserve Bank says healthy OCR cut signals better days ahead

The bank has forecast more cuts in 2025, saying retail inflation is fully under control, writes Catherine McGregor in today’s extract from The Bulletin.

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A substantial cut, with more to come

Chalk it up as a win for the economists. A 50 basis point cut to the official cash rate was what the vast majority of them predicted, and that’s exactly what the Reserve Bank announced on Tuesday. Its monetary policy statement said a drop from 4.25% to 3.75% was warranted, given that economic conditions were consistent with the consumer price inflation target being sustainably achieved. Inflation is currently at 2.2%, roughly in the middle of the RBNZ’s target band of 1%-3%.

While mortgage holders celebrate the cut’s effect on interest rates – though the trickle-through has so far largely been restricted to variable rate loans – the economists are already looking ahead. The RBNZ made it clear that it expects to keep cutting, advising that “if economic conditions continue to evolve as projected, the committee has scope to lower the OCR further through 2025″. The bank’s forecast track for the rate implies another 0.25% cut in April and then again in May, says Kiwibank’s Jarrod Kerr, on its way to a projected 3.14% by year’s end. “In November, the RBNZ forecast that it would reach that point in March 2027 and be at 3.6% in December this year,” notes Businessdesk (paywalled).

Median house prices down

For property market spruikers – and first home buyers ready to enter the market – the interest rate cut will come as welcome news. House sales were up significantly in January, but prices are still in decline, according to the latest REINZ figures. The national median selling price is sitting at $750,000, a 1.4% decrease compared to January last year.

Auckland’s median price of $949,000 is a 1.7% decrease from January 2024, while Wellington’s new median house price is $750,000, 1.3% less than it was a year ago. The Post reports that average prices dropped for every part of the Wellington region “except Porirua, which has gone up from $745,000 to $850,000, an increase of 14.1%. Wellington City has dropped $5000 in the last year to $840,000 while Upper Hutt dropped by a huge $55,000 in price.”

Government trumpets growing economy

Following the OCR announcement, the government was keen to focus on the Reserve Bank’s positive outlook for 2025. “This is good news for New Zealanders. A growing economy means more money in people’s pockets, more jobs and more opportunities,” said finance minister Nicola Willis.

The opposition was more interested in highlighting the conditions that made big interest rate cuts necessary in the first place. “The Bank’s rate cut is a direct response to the economic downturn that Luxon’s government’s decisions have caused,” said Labour’s finance spokesperson Barbara Edmonds. The Greens’ co-leader Chlöe Swarbrick said that while she welcomed the cut, it was “critical to understand the unnecessary collateral damage created by the Government’s chosen path of destruction”.

Farmers have a spring in their step

One group that increasingly shares the RBNZ’s sunny outlook is farmers, who are feeling more confident than they have in over a decade. That’s according to the latest Federated Farmers survey, “which shows falling interest rates, rising incomes and more favourable farming rules have all played a major role in the improvement”, the Herald reports. Federated Farmers president Wayne Langford says that while the turnaround is impressive, confidence is still only barely in positive territory. “It’s been a remarkable recovery in farmer confidence over a short period of time, but I’m very conscious that we were coming off an extremely low base.”