Hopes for the economic recovery have been given a significant boost by the Reserve Bank’s decision to “front-load” cuts to the Official Cash Rate.
The RBNZ today delivered a 50-basis-point cut to the OCR and indicated it was prepared to cut again in November if required.
“Stepping back and looking at the big picture, the economy is past the worst,“ ANZ chief economist Sharon Zollner said.
“There’s uncertainty about exactly what the bottom of the monetary policy cycle will look like,” she said.
“But barring significant new shocks to the outlook, we can all agree we’re a heck of a lot closer to the end of the easing cycle than we are to the start.”
The RBNZ’s Monetary Policy Committee was cautious in highlighting that inflation risks still exist.
It warned that annual consumers price index inflation was currently around the top of the Monetary Policy Committee’s 1-3% target band.
“However, with spare capacity in the economy, inflation is expected to return to around the 2% target mid-point over the first half of 2026,” it said.
Annual inflation is currently at 2.7%, but food and power prices have been rising faster than that.
There were “upside and downside risks” to the inflation outlook in New Zealand, the committee said.
“Cautious behaviour by households and businesses could slow the economic recovery, reducing medium-term inflation pressure.
“Alternatively, higher near-term inflation could prove to be more persistent,” it added.
The committee also noted the ugly second-quarter GDP figure (-0.9%) but suggested there had been at least some green shoots evident in the economic data since then.
“More timely indicators suggest that economic activity recovered modestly in the September quarter, but there remains significant spare capacity in the New Zealand economy,” the committee said.
The 50-point cut was consistent with the softer economic data following August’s review, when the committee was divided between a 25-point and a 50-point cut, Infometrics chief forecaster Gareth Kiernan said.
“It represents the bank’s best effort to provide a shot in the arm for consumer confidence and, by extension, spending activity.”
The RBNZ’s decision was made by consensus, rather than requiring a vote (as it did in August), but the committee noted that “some members” put relatively more weight on the risks that households and businesses remained excessively cautious, meaning that subdued economic activity and employment could persist.
It was felt that a “larger reduction in the OCR could mitigate this risk by providing a clear signal that supports consumption and investment,” the committee said.
Retail NZ chief executive Carolyn Young said the OCR cut would be welcomed by the retail sector.
“This will help give retailers confidence to buy stock and retain staff in the run-up to the end of the year,” Young said.
There will be high hopes in the retail sector that the RBNZ cuts again in November.
“Importantly, the bank signalled the potential for the OCR to be reduced further,” BNZ senior economist Doug Steel said.
The committee said it “remained open to further reductions in the OCR as required for inflation to settle sustainably near the 2% target mid-point in the medium term”.
“The broad message we take from this is that if things pan out as it is thinking the bank is likely to lower the OCR further,” Steel said.
HSBC’s Sydney-based economist Paul Bloxham also anticipated at least one more cut to come.
“By the time the RBNZ arrives at its next meeting on November 26, it will have data on the third quarter CPI [inflation], the third quarter labour market, and other partial activity indicators,” he said.
“Our central case sees a 25bp cut, to 2.25%, in November. This reflects that the jobs market is still likely to be soggy and activity is still likely to suggest spare capacity.”
Bloxham expected the easing delivered would “underpin a solid growth upswing heading into 2026″.
Kiwibank economists said they felt there was a 50/50 chance that the OCR would be cut to 2% in February.
As of 5pm Wednesday, the retail banks had not been quick to pass through mortgage rate cuts.
Only ANZ had announced reductions to its floating home loan, business, and savings rates.
Its floating and flexible home loan rates will drop by 40 basis points to 5.89% and 6% respectively. The business floating rate will also decrease by 40 basis points.
Most major banks announced fixed-rate cuts in advance of the OCR call.
Chief property economist Kelvin Davidson at CoreLogic warned that the direct housing market effects “weren’t likely to be massive”.
Meanwhile, the OCR cut saw the New Zealand dollar drop by about half a US cent to US57.50c from US58c just before the release.
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003. Listen and subscribe to the Today in Business podcast – the top headlines from the NZ Herald business team summarised and delivered by an artificial intelligence (AI) voice as an easily digestible recap.