Policymakers at the Reserve Bank (RBNZ) want to get interest rates back to a neutral level before the end of the year, signalling more cuts to come in April and May.
The central bank’s Monetary Policy Committee cut the benchmark interest rate from 4.25% to 3.75% on Wednesday afternoon. This move was widely expected by market forecasters.
More newsworthy was the strong signal that the committee would continue to cut the Official Cash Rate (OCR) until it hits 3.1% by the end of the year.
Governor Adrian Orr said 25 basis point cuts were likely at the next two meetings if the economy evolved as forecast, but a final cut to 3% in late 2025 was less certain, with the RBNZ’s projections showing a roughly 60% chance.
Other forecasts show that a faster pace of cuts will weaken the NZ dollar relative to trade partners, driving up headline inflation through higher import prices. Meanwhile, economic activity and unemployment projections remain largely unchanged in the lower-rate scenario, demonstrating the need for cuts.
The output gap, a measure of economic slack, was revised from -1.5% in November to -1.7% in February, suggesting more spare capacity than previously estimated. Also, revised GDP data from Statistics NZ showed the economic slowdown began later but accelerated faster than expected at the November meeting.
Orr said the outlook changes were minor, and the lower OCR track mainly reflected the committee’s growing confidence that inflation would stay within the target band.
Risks either way
The risks to the new forecast were split. In the near term, there was a risk the economy would not pick up as quickly as expected. It was difficult to predict a turning point, he said.
But then there was also a risk growth could gather too much momentum and reignite inflation problems. This can happen if deferred investment gets released all at once, as interest rates fall.
"In the near term, it may take a little bit longer, if people want to see other people are spending before they do, and then in the medium term, it could come back quicker," Orr told reporters.
“We played the mental exercise, if we had to buy insurance today, what would we be insuring against? And that's unclear. In other words, [we’re] in a pretty good position.”
He said the New Zealand economy was entering a “benign period” for the RBNZ, with the exchange rate at its fair value, interest rates nearing neutral, and inflation on target.
One big concern for the future is how US President Donald Trump’s tariffs might play out for inflation and economic growth, but the RBNZ’s chief economist Paul Conway said it was too hard to predict what it might mean for interest rates.
“There's a lot of uncertainty about it currently, but it's clear tariffs are negative for growth, both globally and here in New Zealand, and the effect on inflation is uncertain”.
Slower growth might result in lower interest rates, but less efficient supply chains might mean higher prices and higher rates. It would be highly scenario specific, Orr said.
Good as it gets
Whatever happens, households shouldn’t expect retail interest rates to drop much further. The OCR mainly affects short-term rates, while global factors drive longer-duration rates.
RBNZ assistant governor Karen Silk said the market had been pushing rates up to account for US trade policy and higher levels of sovereign debt in many economies.
“I would say that the expectation that longer term rates will move substantially lower is probably a lot less [than with floating rates],” she said.
The average rate on existing mortgages is expected to fall to 5.8% by the end of the year, down from 6.4% in late 2024.
Most bank economists thought the RBNZ was moving rates in the right direction, and that their new outlook better aligned with market forecasts.
But Infometrics chief forecaster, Gareth Kiernan, said the central bank’s assessment of risk looked unbalanced and that it risked “overcooking the monetary policy easing”.
“We see a real chance that faster or more cuts by the Bank lead to another monetary policy overshoot, amplifying the economic cycle again, and necessitating another tightening cycle in 2026,” he said.
48 Comments
Interest authors keep saying this ‘Whatever happens, households shouldn’t expect retail interest rates to drop much further. The OCR mainly affects short-term rates, while global factors drive longer-duration rates.’ Be careful with that type of assumption. Rates are coming down 4.79% with ANZ private today. I think we will see fixed rates in the 3s before the end of this year.
Seems like it is pretty much a consensus view that the OCR won’t go below 3%, and shouldn’t.
Are there ANY professional, public-facing economists who don’t think this? Not that I can think of
I could be wrong, but I suspect our economy is really going to keep struggling this year, and it will *need* an OCR lower than 3 to keep it on life support.
Rob MacCulloch considers 4% as the "neutral rate of interest" & "...that you can not directly observe the neutral rate. It is an academic concept."
"When you're dealing with an outfit full of dubious hires, and a Senior Leadership Team that has barely studied economics, you never know what it will do next."
A Comment on Chief Crazy Horse Reserve Bank of NZ's Official Cash Rate Cut Today
Thanks. But he’s going in the other direction
I don’t disagree with his point, but it is predicated on big structural change. Which I agree with, but I don’t see that change occurring, hence I think our economy would be decimated if the OCR was kept at at least 4%.
This country is at a real economic crossroad
The debt level isn't so much of an issue, than the reality we spend more than we make. Fixing that would indeed involve quite a lot of pain, felt mostly by the bottom.
"Moving forward as a nation" actually requires some level of shared view, and we've spent half a century or more fragmenting views rather than consolidating them.
Yes the private debt is a problem as our economy cannot function with interest rates at historically normal levels - and can only survive with rates at extremely low or ‘emergency level’ rates. Ie not much above 0%.
We are being held captive by debt ie we are a slave to it. It is the problem, not the solution. Dropping rates just creates more of the problem.
If debt wasn’t a problem then we should be able to have stable 5+ % mortgage rates and returns for savers.
This prevents excessive debt from being issued and stops people from ditching savings to speculate in higher risk investments - ie it brings stability to the entire economy. Dropping rates to near zero brings immense instability as people start chasing returns with more and more risk as the returns on savings/low risk assets gets decimated. In my opinion what we’ve been doing the last 10+ years is financial mismanagement to the extreme. Savers should be rewarded for saving and being prudent (and remember todays savings are tomorrow’s investment) but instead by dropping rates everyone piles in on high risk investments and tries to invest nearly everything today - it creates severe instability which then comes with a hangover.
We desperately need a period of stability that is founded upon balanced monetary policy - not flip flop from one extreme to the other.
If I were Orr I’d be keeping rates level now for as long as possible to allow the economy to find a new equilibrium - we don’t need another private debt explosion - although vested interests will argue we do. But then again they believe their own financial gain is more important than the financial and social stability of the nation as a whole.
Independent_Observer : "Our problem is private debt is 140-160% of GDP. Fix that and we can think about moving forward as a nation - but it’s going to be painful. "
There is a simple fix.
Tighten the LVRs and DTIs - especially for 'investors'.
Tighter LVRs and DTIs for 'investors' will also see them paying tax far earlier.
Nicola? Do you understand that? (Or do I need to spell it out using small words?) Publically this government won't exert any pressure on the RBNZ in this regard as they have their voter base to pander too. But privately? If they really cared about Kiwis and our cost of living - on which so much is spent on housing - they would be in Orr's face every single day!
Won't immediately address the private debt problem, but after a decade it'd be back in a sensible range.
(At this point, I'll leave it to JFoe to point out that govt needs to get stuck in and pick up the slack.)
This.
Our young talent pool is leaving in record numbers. The PM says to stop it, NZ must increase wages. But people also value status, not just money. And the high status jobs have all been given away to well-connected mates of National & Labour. Otago's Vice Chancellorship should have gone to one of our top research scholars who has become a big name on the world stage, of which there are a surprising number - but no, it goes to Disgraced Former Finance Minister Robertson.
And this
This week, NZ First Leader Peters announced 70 year old Heather Simpson, who was Helen Clark's Chief of Staff, has been appointed as Director of Ferry Holdings, in charge of buying new Cook Strait Ferries. She advised Labour on how to lock-down NZ's borders even tighter during Covid and was behind the disastrous creation of Health NZ that wrecked health-care. She joins 76 year old Sir Peter Gluckman advising Judith Collins how to restructure science and get NZ into the likes of AI, which he barely knows a thing about, and 70 year old Management Lecturer Lester Levy, who's in charge of single-handedly revamping our health system.
Wow its just a joke. Does everyone want another debt fuelled property boom ? He needs to stop spouting what he is going to do because its stopping him doing what he needs to do at the time. The world is hardly "Stable" right now, he needs to be able to pivot and pivot fast.
Well they were removed in 2020-2021 when they were most needed to prevent reckless lending - so the RBNZ are the arsonist and the firefighter.
You know, the people now in negative equity and debt stres wouldn’t be in negative equity and debt stress had the RBNZ not allowed them to get that debt - but the removed the LVRs to allow the reckless lending and for house prices to go up 30-40% in a crazy short amount of time.
They are their own worst nightmare. Like a bi-polar personality disorder - ‘we must lend as much as possible to everyone’ (2020-2021) nek minite ‘we’ve lend too much to too many people and the economy can’t support this debt load’ (2022-now)Can someone call a psychiatrist for Adrian Orr?
Agreed. Plenty here espouse leveraged borrowing to the max on houses and waiting for the inevitable inflationary storm to bail them out. Solialise the damage while they and the bank profit if you will. Great for the remainder of society...and they wonder why people get mad. But hay...max out and fix long and roll the dice on whether you win or lose.
Well after the last experience, I'm not really interested in "On paper gains" on my place, that was easy come easy go. Basically we are on what looks like a roller coaster ride and everyone knows, its fun while it lasts but, sooner or later the ride comes to an end.
Couple of points ...
1. Take another look at the graph above showing the OCR track prediction made in May '24. And look hard at the one made just a few months later in August '24. How did they get this so very, very wrong? The gap between to the two is absolutely staggering!
2. Remember I've been saying the RBNZ should have started easing back in November '23? They didn't (obviously). Instead, they stuck with their nonsense until August '24 when they finally admited they had it way, way wrong. That's 10 months where they could have avoided the problem they have now. Which is ... from Orr's mouth ...
The risks to the new forecast were split. In the near term, there was a risk the economy would not pick up as quickly as expected. It was difficult to predict a turning point, he said.
But then there was also a risk growth could gather too much momentum and reignite inflation problems. This can happen if deferred investment gets released all at once, as interest rates fall.
So the RBNZ's MPC has shafted the NZ economy for 10 months more than they should have. And will continue to shaft it because they 'reckon' there is a risk of inflation if they drop too fast! A problem that would have been avoided if they'd started gently easing in Nov '23.
FYI: Why did I choose Nov '23? That was when non-tradeables inflation was confirmed to be tracking down while tradeables inflation had been declining for 4-6 months.
Worst central bankers ever !!!
You've put your finger on something there, Chris. The RBNZ used predominantly lagging economic indicators to inform a decision (ie when to start cutting) which had to be made in real time. It does not appear this information deficit was offset by competence and wise judgment.
So they went sailing past the mooring, and now are desperately swimming back to reach it against the tide. But I fear their feet aren't touching the bottom of the pool.
Had this affair been managed competently, the probability is that rates would have come down a little and much sooner and would have stayed there, providing support to a flat-lining economy. Instead we now have borderline emergency/panic cuts going further down than was necessary, in the face of inflation that has not yet been fully tamed and risking another credit and asset price bubble.
Not sure sorry. They're offering 5.99% now for 6 months but I don't think I'd be bothering with that right now when the 3-year rate is 4.99%. I usually get a slight discount on the special rate too, so a couple more cuts over the next half a year will be interesting.
"Governor Adrian Orr said 25 basis point cuts were likely at the next two meetings if the economy evolved as forecast,"
Orr speak with forked tongue. I'm not sure if I picked up which way the economy is going. So does this mean he watches the economy and inflation and makes a "forked" decision. Kinda like one the one hand but on the other..... Trying to have a bob both ways.
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