The Reserve Bank (RBNZ) ended 2024 with what looked surprisingly like a promise. It will kick off 2025 with a delivery.
Delivery of a 50-point cut to the Official Cash Rate (OCR), taking it down to 3.75%, is universally expected on Wednesday, February 19. Anything else will cause major palpitations in the markets.
That's because Reserve Bank Governor Adrian Orr was about as explicit as you will ever see an RBNZ Governor be (on interest rates) when he said after the last OCR decision for 2024 on November 27 that the bank's forecasts were "consistent" with another 50 point cut in February.
It may be that the catalyst for the surprisingly forthright OCR guidance from the Governor was initial reaction to the November 27 decision (a 50-point cut), which was accompanied by RBNZ commentary that the markets and indeed yours truly were regarding as quite 'hawkish'.
With the next OCR decision at that point nearly three months and one summer away, Orr may have decided he didn't want to leave people 'hanging' - and so provided clarity, which sure enough, calmed the markets.
The only thing that could have upended this near-promise of a 50-point cut for the coming week would have been some nasty economic surprise.
And while the GDP figures for the September quarter released on December 19 were quite a shock, the news was largely retrospective and wouldn't be sufficient to change the RBNZ thinking for next week - although it will have certainly caused the RBNZ to re-examine where it thinks the OCR may ultimately need to be.
The economic data has been conducive
Generally, the economic data has otherwise turned out broadly as expected.
Inflation as measured by the Consumers Price Index (CPI) remained at an annual rate of 2.2% as of the December quarter - and a touch higher than the RBNZ forecast. But the measure of domestic 'non-tradables' inflation, at 4.5%, was lower than the RBNZ forecast.
Unemployment for the December quarter came in at 5.1% - exactly in line with the RBNZ forecast.
The closely followed NZIER Quarterly Survey of Business Opinion for the December quarter showed improved levels of business confidence, with subdued levels of inflation and pricing pressures expected.
The Reserve Bank's Survey of Expectations showed that inflation expectations are now nicely anchored in and around the 2% level the RBNZ explicitly targets within the aimed for 1% to 3% range.
So, the light is shining bright green for the anticipated 50-point cut to the OCR.
This will mean that come February 20 the OCR will have been dropped by 175 points from the 5.50% cycle high point since the cutting commenced in August 2024.
A big deal for the mortgage market
Banks began cutting mortgage rates ahead of the first OCR reduction in August and rates on the most popular (two years and under) fixed terms have been lowered from their cycle peaks by between about 150 basis points and 195 points at time of writing - bearing in mind that rate tweaks are an almost daily occurrence at the moment.
What that suggests is that the OCR cuts to date - and this includes the assumed 50-pointer in the coming week - have already largely been incorporated into the banks' mortgage rates.
It therefore becomes of vital interest what indications the RBNZ may gave about further reductions to the OCR in future.
The RBNZ's current thinking is that the so-called 'neutral' rate, at which the rate is neither stimulatory nor restrictive is between 2.5% and 3.5%. So, at 3.75% it will still be (just) in 'restrictive' territory.
In its November Monetary Policy Statement (MPS) released in conjunction with the last OCR decision of 2024, the RBNZ indicated the OCR may be reduced to around 3.5% by the end of this year, 3.25% by the end of 2026 and 3.00% in 2027.
Some major bank economists want to see a bit more movement than that.
And of course this is all of very much more than passing interest to the homeowners that collectively have around $370 billion worth of outstanding mortgages.
In anticipation of OCR reductions the country's mortgage holders have been fixing for ever-shorter terms. That's resulted in about 55% (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.
Over 82% of the entire mortgage stock will have a reset of interest rates this year. Therefore, the interest costs being paid by people will change very quickly after there is a change made in the rates by the banks.
Theoretically this then puts more cash in people's pockets, which is then available to be spent and to boost the flagging economy.
The heat is on
It all means that the weight of expectations is very much on the RBNZ.
And some of these expectations are coming from the very top.
In a media release on January 22 welcoming the 2.2% inflation figure, Finance Minister Nicola Willis remarked: "Decisions about the Official Cash Rate are a matter for the Reserve Bank but the decline in domestic inflation is good news for people with mortgages."
And the following day (January 23) Prime Minister Christopher Luxon suggested that the RBNZ (which is independent from the Government, lest we forget) should meet more regularly to make OCR decisions.
The RBNZ will be issuing a new Monetary Policy Statement on Wednesday. And as ever the first thing that will be read will be the new set of forecasts for where the OCR may go.
Mortgage holders, and you kind of get the impression the Government too, will be very interested to see if these new forecasts show a lower - and faster - OCR track.
There's a bit of a divergence of views forming among economists as to where things will go from here.
Some see the RBNZ being more cautious after the coming week's review, while others certainly believe the cuts should and will keep coming through the year.
And the economists say...
I'll leave you with some quick quotes from economists from a couple of the major banks.
ANZ chief economist Sharon Zollner and senior strategist David Croy have pencilled in a low point of 3.5% for the OCR, but say "the risks are currently tilted towards the OCR going lower than that".
"We expect the tone of the Monetary Policy Statement to be one of confidence that the inflation outlook is benign, while acknowledging upside risks to tradable and thus headline inflation," they say.
"The OCR track will likely be lower, due to the GDP surprise, but given capacity indicators have been mixed, and taking into account the offset from the lower NZD [NZ dollar] and higher export prices, we aren’t expecting a very large change in the track overall.
"The RBNZ is unlikely to feel the need to once again provide such explicit guidance about where to next, given the next meeting is just six weeks away.
"There’s a paucity of top-tier data between now and then, meaning the market is likely to be reluctant to budge from expectations for a 25 [basis points] cut in April, unless the RBNZ’s tone surprises significantly next week," Zollner and Croy said.
The Kiwibank economics team have for some time been stridently of the view that the OCR was hiked too high and for too long and have pushed hard for the RBNZ to signal a more aggressive cutting cycle.
"We think the RBNZ’s November OCR track has already proved too hawkish," Kiwibank chief economist Jarrod Kerr, senior economist Mary Jo Vergara and economist Sabrina Delgado say.
"And as such, we’re expecting to see the OCR track pushed lower and pulled forward [in the coming week]. That is to say, we expect more rate cuts sooner rather than later.
"Our view remains. We think a total of 125 [basis points] this year, to get us to 3%, is needed… with risk of more. And again, markets have come to agree with us. Originally, following the hawkish November MPS, markets had only toyed with the idea of us getting to 3.25% by the end of year. Now, more recently, markets have us priced to get to 3% by around the third quarter of this year," the Kiwibank economists say.
"To secure the economic recovery this year, the RBNZ must relax policy settings further. We question, why pause in restrictive territory?"
*This article was first published in our email for paying subscribers first thing Friday morning. See here for more details and how to subscribe.
92 Comments
The discussion around the official cash rate (OCR) overlooks a fundamental issue: why should privileged banks continue receiving risk-free returns on their reserves? A positive OCR is effectively a state-sanctioned subsidy, allowing banks to earn free money for doing nothing. The neutral rate for overnight reserves should arguably be zero or negative, similar to the 1-2% management fees the private sector extracts from wealth management.
With government-guaranteed deposits already blurring the line between commercial bank accounts and "central bank digital cash," the need for a positive OCR disappears. If the average person can access a risk-free deposit at the central bank—either directly or effectively through government-backed commercial bank deposits—then it is up to commercial banks to offer competitive rates to attract deposits. A positive OCR is not necessary to sustain the financial system; rather, it's the positive rates of commercial bank deposits that will determine whether banks can still compete for capital.
Moreover, as more people choose to hold money with the central bank, it should naturally drive down interest rates. If safe central bank deposits become more widely accessible, commercial banks will have to compete by offering higher rates, rather than relying on a subsidized OCR. The OCR does not determine the real cost of borrowing—that’s set by the government’s creditworthiness and whether the central bank manipulates yields, as we saw in 2020-21 when it printed $50B to suppress rates and fuel asset inflation.
The new government has another $50B pre-approved. If it chooses to deploy it, it should prioritize investments that enhance productivity—such as expanding sustainable energy generation and recouping the investment through Bitcoin data centers that monetize excess energy. This not only creates economic efficiency but also backs the currency with real value rather than inflating asset bubbles and enriching financial intermediaries. If monetary expansion is inevitable, it should serve as a foundation for long-term growth, not just another transfer to the financial sector.
'Reserve Bank set to deliver promised OCR cut - but what next?'
The next housing boom, of course. we never learn.
Read Dean Attewell (A new approach to economic stability) for some rare sense.
Jobseeker numbers increasing at 13% year-on-year and job growth at -1%. Job vacancies on the floor. Company liquidations smashing through the ceiling. Thousands of young people leaving the country.
RBNZ... 'hey guys, let's have a very serious discussion about whether we continue with restrictive settings... maybe we haven't got enough people on the dole yet?'
People are leaving because earnings make no sense in relation to housing costs. The RBNZ simply choosing to give more support to housing costs won't entice people to stay.
Maybe try offering them a little more like what today's older generations were offered. That'd give them something to stay for.
We have decided that we will be spending about half the interest rate cuts, which is quite a lot of extra spending. I believe the default when you refix in the bank apps is to keep the loan duration the same, and most people will probably go with the default, so they will spend 100% of the cuts.
Question is how much of that discretionary spend will actually encourage more local production, versus bidding up prices or buying more imports and weakening the NZ$?
My guess is that it will provide some welcome recovery for hospitality and retail businesses, but we'll start to see expensive imports (electronics, furniture etc) pick up too.
If there is nothing to invest in and/or no confidence to invest the 'cost of money' makes little difference
Credit creation can either be
For non-productive purposes: Consumption + Financial (credit for transactions that have little direct effect on GDP - for ex, the Aotearoa Ponzi)
For productive purposes: Investment (credit for the creation of new goods and services and productivity gains)
I think you need to clearly differentiate between the different components.
There is no need to differentiate between productive/non productive credit/debt to make the point that interest rates are not the driving force.....as stated if there is no perceived opportunity or expected return then there is no incentive to borrow/lend no matter the rate.
There is no need to differentiate between productive/non productive credit/debt to make the point that interest rates are not the driving force.
Wrong. It is extremely important to differentiate because of the following:
Financial credit is for the Ponzi - more or less comes out of thin air - and is the lion's share of credit creation by a country mile. That is where the banks make their moolah and the credit stream keeps the Aotearoa economy afloat so it doesn't collapse in a screaming heap. The implications of this speculative credit drives consumption credit and investment credit.
If the Ponzi wasn't the be-all-and-end-all, then you are correct that it would be less necessary to differentiate the use of credit creation. But the monster is so big now that it is more important than any other consideration, even employment.
You wish to seriously suggest that people/entities will borrow to purchase assets with the expectation that those assets will decline in value and/or the return is negative?...or that any creditor with the same expectation would provide the credit?
That is the perceived lack of opportunity referenced and it matters not whether the asset is productive or not.
You wish to seriously suggest that people/entities will borrow to purchase assets with the expectation that those assets will decline in value and/or the return is negative?...or that any creditor with the same expectation would provide the credit?
Good question. The reason why Ponzinomics has been so desirable is because it has generally worked until it doesn't. Then, the cost of credit is lowered and base money juiced until it starts working again. 100% agree that the ruling elite doesn't want the great unwashed to stop borrowing greater amounts as that leads to asset price deflation. So if you want my reckon:
At this point, the Aotearoa ruling elite cannot stop the train unless they are prepared to accept the negative economic and social consequences. Along with that, if they want to win the popularity contest to retain power, they must suppress the cost of credit - it's up to the hoi polloi how to work out how to preserve the purchasing power of their own moolah. F'more, they know that the private banks will ensure that the base money is converted in to broad money. The banks have absolutely nothing to lose and everything to gain. It's not as if they operate under constraints like other businesses.
Still waiting for you to prove there is any core relationship between the OCR and the NZD.
Keep in mind that 'correlation is NOT causation'. The OCR goes lower when NZ's economy is in the pooh. The 'shares' in NZ Inc. are NZDs. When the NZ economy is screwed, like a company's share price, the NZD falls.
Well, after listening to 'Bloomberg Real Yield', it sounds like the US still has a sticky inflation problem and might only have a single cut this year, with the possibility of no cuts. Some of the experts think the US 10Y will reach 5% this year and could go as high as 5.25%.
Their 2y is at Fed funds currently so no room for cuts with June predicted to be the earliest.
I enjoy hearing Americans talk about their strong economy and repeatedly say "higher for longer."
The only conversation we should be having is why the RBNZ has been so very, very slow to bring the OCR down to the neutral rate.
The RBNZ have provided no reasons why it is so far from neutral. Even after a 0.50% cut, the OCR will be at 3.75% ... and STILL 0.75% to 1.00% shy of the neutral rate.
The RBNZ's sole mandate for setting the OCR is inflation. And with inflation being inside their target range for six months - we should be BACK AT NEUTRAL. The RBNZ have no mandate to make NZ Inc suffer when it is NOT required.
Worst central bank EVER !!!
The only conversation we should be having is why the RBNZ has been so very, very slow to bring the OCR down to the neutral rate.
Possibly because historically, prematurely declaring inflation beaten has been met with some fairly bad consequences.
Push it down, and give it a few good kicks, lest it get up again too quickly.
Pa1nter: "Possibly because historically, prematurely declaring inflation beaten has been met with some fairly bad consequences."
Care to cite some examples from the modern central banking era?
The only situations I'm aware of have nothing to do with central banking actions and everything to do with events that central banks have zero control over. This leads to conclusions like yours which are missing core details and possibly provide not much more than folksie wisdom.
From when central banks took control setting interests using interests rates in the great 'how to control inflation' experiment.
March 1999 in NZ's OCR case, but they had other tools prior to that. Much earlier in the case of the US Fed, '61 by some reckoning. But rammed home in the Saturday Night Massacre of '79.
So let's say from the early 90s onwards.
There's a precedent there set by easing up on lending too quickly. I'm not sure if the RBNZ would totally omit any historic observations because they don't fit into a timeframe you have isolated.
I've just given a possible answer to your question re:why haven't the RBNZ dropped rates sooner. Up to you whether you want to discard it or not.
Inflation targeting was pioneered in New Zealand in 1990.
if you look at this chart and select Max you can see how effective it has been: https://tradingeconomics.com/new-zealand/inflation-cpi
It has been an unmitigated POLICY disaster if you ask me. Rather than looking at the underlying factors driving inflation, we just crank up interest rates. The problem is when they are lowered the underlying factors remain, as they were never addressed. Housing speculation being an obvious example of this problem.
Interest rates have let governments off the hook from actually addressing problems on a long term basis.
"The RBNZ's sole mandate for setting the OCR is inflation".
Not quite: also have regard to stability of the financial system, avoid unecessary instability in output employment interest rates & exchange rate.
https://www.rbnz.govt.nz/-/media/project/sites/rbnz/files/monetary-poli…
Eg. If NZ OCR drops significantly while the USA maintains/increases as recently indicated the NZD will drop, increasing import prices = inflation pressures
kiwikidsnz: "If NZ OCR drops significantly while the USA maintains/increases as recently indicated the NZD will drop..."
Still waiting for you (and Blackbeard and JimboJones) to prove there is any core relationship between the OCR and the NZD.
Keep in mind that 'correlation is NOT causation'. The OCR goes lower when NZ's economy is in the pooh. The 'shares' in NZ Inc. are NZDs. When the NZ economy is screwed, like a company's share price, the NZD falls.
High school economics teaches that increased money supply is inflationary. Yet we now pay someone over 800k/year to fail at high school economics and let the entire country suffer the broad reaching impacts of their foolishness. MPC aside, as yet it is a committee, where in the world can you fail at core performance objectives and get double your salary and another 5 year term at the help.
What have GDP figures got to do with it? What has unemployment got to do with it? The RBNZ's one mandate is to follow inflation. The other factors they have regard to (stability, etc) relate mainly to the pace of change. No one can accuse the RBNZ lately of irrational speed, that's for sure.
Lower and moderate income households are affected very badly by CPI inflation. Food prices, which are sort of important given people eat food, went up significantly in the last two months. So what's all this other stuff about??
The RBNZ's current thinking is that the so-called 'neutral' rate, at which the rate is neither stimulatory nor restrictive is between 2.5% and 3.5%. So, at 3.75% it will still be (just) in 'restrictive' territory.
Paul Conway's line of reasoning isn't correct, and/or, the words used above don't reflect how a neutral rate should be considered.
To explain further:- if NZ Inc's economy is steaming along tickety-boo - but perhaps slightly hot - then a suggestion could be made - at that time only - that the 'neutral rate' might be closer to 3.5%.
Are we in that situation now? NO. WE ARE NOT !!!
We may still be in a recession. In any event, NZ Inc's economy is far from tickety-boo and spare productive capacity is rising fast.
So - at this time only - the neutral rate is far more likely to be be at 2.50% - most likely even lower !!!
Thus, at 3.75% the OCR isn't 'just in restrictive territory' (as David suggests) ... It is - in fact - way into restrictive territory by some 1.25% or more.
I think he now regrets not cutting faster earlier, the big issue for them is 75bps moves look like panic.... unless there is some natural or economic disaster... he goes 50 here and then 25 for a while I think. Economy will need a low neutral rate as their is no credit impulse anymore.
If the RBNZ's MPC were to cut by 0.75% - together with more strictive LVRs and DTIs (especially for 'investors' to get them paying tax earlier) - I doubt anyone who knows much about macro-economics would conclude they are panicking.
In fact, many of us would conclude they might be finally 'getting it'.
Problem with that is they've shown zero interest in changing the DTI settings. Especially for specuvestors - which as we already know are far less restrictive than for OO.
Sadly, whilst the RBNZ has the levers to fix this, this is a moral not a financial decision, and so requires a legislative mandate from the government - which I have no confidence will ever happen.
I agree, that's possible as dire data continues to emerge about the true health of the NZ Economy.
I am not sure that the cost of money is holding back businesses right here, it is however hammering their customers. Most businesses will not immediately lend, rather they will try and rebuild a buffer, volumes will likely be lower then just before this recession for anyone involved even remotely with housing, thats alot of trades and suppliers.
Its pretty clear that NAct are now looking for Foreign direct investment to fund infrastructure buildout as neither he wants that debt on his books, and average NZers are in no position to fund it (unless via kiwi savers, but they have a duty to remain well diversified).
If he can get enough big projects spun up quickly it just might be enough of a pulse to save his ass during a second term. Its the only trick they have left in the playbook. These projects will toll/read tax NZers for use. I guess we are thinking motorway all the way to Whangarei , 2nd harbour crossing in Auckland.
Pretty clear he is going to IMHO try and get DFI into interislander ferries , though WP is obviously not too keen. maybe he will allow if its fully rail enabled day one.
Maybe we need to look at our power companies and market structure. Though I would rather NZers kept ownership of energy here.
Maybe we need to start considering a LNG terminal.
Without the injection via FDI the NZ Economy will continue to contract, and NAct will lose, not this first one, but the next for sure.
It seems that NZ First now has got the message
Would we have a problem with a higher OCR if we didn't have the problem of excess debt?
NZ is a little backwater country ruled by greed.
Whilst I disagree with pretty much all of their decisions under A. Orr, those who could helped themselves to debt at alarming rates during his tenure. Which should have been an obvious outcome, as that's what they were already doing before he came along and threw fuel on the fire.
Yes, the poor and the have-nots suffer the result of the medicine along with those who loaded up on debt. But that doesn't mean we should let the debt junkies back to their habit - as what we are seeing is the result of 20+ years of an addiction that has caused significant changes to NZ society. The poor and have-nots were also suffering before the medicine's administration, due to the unfettered greed of those who "lord" over the land.
Interest rates aren’t our problem - our private debt to GDP is our problem. (140-160%). It’s a private credit bubble that needs to pop. Until that happens, we all suffer as we pretend that lowering interest rates to maintain excessively high private debt to our productivity will make everything ok again - it won’t.
So if inflation is now in the target band, why would they cut ? The RBNZ doesn't care that you are overleveraged and/or just lost your job, they told you a year ago that was coming. Now that people are experiencing a bit of hardship they are all screaming at the self induced pain, they want rates slashed again.
Most can handle the current rates or expected slight relief, the real screaming is coming from those who paid too much for low yielding investments. They know that it will be impossible to sell at the price they paid , unless the next owner can fund at much lower rates. there is some denial here... the "mortgagee sales are not going up crowd...". This is true, people seem to be able to hang in, but it does not mean people are prepared to purchase this low yielding assets at the price paid when 5 year was 2.99%.
Its screaming coming from the obvious capital losses they will have to take, remember the cashflow yield was never enough to even fully fund ownership...
Which will translate into a lower quality of retirement for many.
It will be interesting what the press release of MPC will be after the announcement. When you look at the jump in monthly food and fuel as reported last Friday, you can conclude that the CPI has bottomed out and that mainly the domestic inflation, see the milk and butter, domestic transport price increases, will push upwards. On the other hand there is no short commitment from investors to fund government bonds with all YTD auctions overscribed massively.
https://www.nzherald.co.nz/business/liam-dann-could-an-inflationary-reb…
We’ll get new forecasts on Wednesday but the Reserve Bank currently has a wide spread on where it sees the “neutral rate” – somewhere between 3.5% and 2.5%.
Where the OCR ends up landing this year matters a lot.
If it’s 2.5%, there are likely some decent falls in mortgage rates still to come.
If it’s 3.5% then we shouldn’t expect much more of a break.
It’s all wildly unclear.
That’s why we shouldn’t be counting on rate cuts to save us from here.
There’s too much riding on the success or failure of Trumponomics.
If he drops the OCR by .05% and signals further cuts later in the year that will put considerable pressure on our dollar. Imports will increase cost wise and that is passed onto consumers. Beware what you wish for. Every action has a consequence and sometimes the consequences are not worth the gain received from the action. New Zealanders already have closed their wallets. A depreciating NZ dollar will not help at all.
ex agent: "If he drops the OCR by .05% and signals further cuts later in the year that will put considerable pressure on our dollar."
Still waiting for you (and Kiwikids and Blackbeard and JimboJones) to prove there is any core relationship between the OCR and the NZD.
Keep in mind that 'correlation is NOT causation'. The OCR goes lower when NZ's economy is in the pooh. The 'shares' in NZ Inc. are NZDs. When the NZ economy is screwed, like a company's share price, the NZD falls.
I’m not sure this .5 OCR drop will weaken the nzd it could technically do the opposite , I think this drop could drop long term rates lower which is basically saying that your purchasing power in the future is stronger than thought previously, so strengthening for the bond market which helps with the buoyancy of the currency .
I gotta admit i havent read all the comments but.....
Most people commenting focus on the housing market, its just so engrained in all Nz'ere that it dont see how this country will ever shake it off and move into a more productive frame of mind....
What should be the focus is the relief it will give to farmers and bhsiness owners, who actually contribute directly to the economy, where this ( hopefully) 0.5 cut could make the difference between bankruptcy or surviving...
Instead the focus is on what it will do to people who bought over valued houses...
Its messed up......
If the reserve bank hasn’t said they are going to drop 50 points, I don’t know how this is expected. I would have thought the prudent approach was to wait to see what effect the previous drops took. The RB has overshot in both directions previously. I ask picking a 25 point drop if anything at all
Which markets would experience palpitations? As far as global markets are concerned, NZ's economy could cease to exist without a blip on the chart.
If we are just talking about any market in NZ, anyone for whom 0.5% on a lending rate will cause any concern is so hideously leveraged that they've earnt a coronary from their own efforts, without any assistance from the RBNZ.
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