Banks didn’t pass on the full Official Cash Rate cut ... is that fair? – Inside Economics

Banks have several reasons for not passing through the full OCR cut. Photo / Dean Purcell

Welcome to Inside Economics. Every week, I take a deeper dive into some of the more left-field economic news you may have missed. To sign up for my weekly newsletter, click here. If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.

Rates pass through

Q: The Reserve Bank recently dropped the OCR 25 points to 3% to stimulate the economy and get consumers spending again. Our bank only dropped our rate by 15 points from 5.94% to 5.79%. Is this fair or right, and are they just boosting their already excessive profits?

Ross C.

A: Hi Ross,

This is a good question. I can provide some context about what drives the pass-through from the Official Cash Rate to the mortgage rates we eventually have to pay.

I couldn’t find the specific rates you used for your example, but I can confirm that the standard pass-through after the latest Official Cash Rate (OCR) decision was 15 basis points or 20 basis points (bps).

That information on the pass-through rate is now published by the Financial Markets Authority (FMA), which records the rates before the cut and again seven days after.

The data are for floating or variable rates, which have the most direct correlation with the OCR set by the Reserve Bank (RBNZ).

Fixed rates are more complicated because the timeframes involved mean the banks look forward and make assumptions about where interest rates are expected to go to work out a competitive rate.

What we can say for sure about the floating and variable rates and fixed rates is that no major bank passed through the full 25bps.

According to the FMA data, ASB, BNZ and TSB have passed through just 15bps.

Westpac, ANZ, Kiwibank and SBS have passed through 20bps. The Co-operative Bank has passed through 25bps.

Why the variance?

There are a couple of reasons the banks will give for the variance.

One is that the cut may have been partially priced into rates already, based on the high level of certainty that it was going to be made.

When market expectations for a rate cut reach the point of near certainty, then pricing for wholesale rates starts to look a lot like the cut has already happened.

That allows banks to pass through savings before the OCR announcement.

A number of banks cut their fixed rates before last month’s OCR announcement.

Often, the timing of rate cuts has more to do with marketing and competition than it does with the actual OCR announcement.

The other really big driver of the pass-through from the OCR is the cost of international borrowing.

Banks fund about 80% of their mortgage lending locally through deposits, but have to go offshore for about 20%.

Previously, this ratio was more heavily weighted towards international funding, but the RBNZ tightened it up after the Global Financial Crisis (GFC).

Regardless, if international borrowing costs are rising, this makes it harder to pass through all of an OCR cut.

Anyway, these are the answers you get from the banks.

There are other places to look for insight on whether we’re being ripped off on rates.

While we are never privy to all the variables driving the banks’ pricing of mortgages, we can at least look at how the pass-through stacks up against the pass-through on deposit rates.

Again, thanks to the FMA, we can see that ASB, Westpac, Kiwibank and TSB have all managed to pass on 25bps to on-call deposits.

ANZ just cut the deposit rate by 10bps, Co-operative Bank by 15bps and SBS was unchanged after a week.

RBNZ analysis

The RBNZ tracks bank rates and has done some analysis on the pass-through rate, with regards to two-year fixed mortgages, anyway.

RBNZ research in 2021 found that a 1% change in the OCR typically moves average two-year mortgage rates by 0.34% within one month.

The pass-through from changes in monetary policy increases over time, with the peak impact on mortgage rates coming about six months after the change in the OCR.

At that point, about 80% of the initial 1% change in the OCR is typically passed through in higher or lower mortgage rates.

In theory, the shorter the fixed term, the quicker the pass-through should be. It should be almost instantaneous for floating rates. And it more or less is, although whether it is actually any fairer, I‘ll leave for you to decide.

Chinese investment falling

A new report put together by the New Zealand Institute of Economic Research and the New Zealand China Council shows that Chinese direct investment in New Zealand has been falling.

From 2022 to 2024, China’s investment in New Zealand reduced by 18%.

On that basis, Chinese foreign direct investment (FDI) is now lower than in 2019.

The report, Invested Interests: An update on the New Zealand-China investment relationship in 2025, found that foreign investment from China to New Zealand between 2014 and 2024 grew at a faster rate than overall Chinese foreign investment. But investment from China has been slowing in recent years.

Cumulative foreign investment into New Zealand increased by 65% over the period, while investment from China more than doubled from $695 million to $1.43 billion – growth of 106%, the report said.

But most of this increase occurred in 2014-19, the report said. Since 2019, there has been a small decrease in cumulative Chinese investment in New Zealand.

China ranks 12th as a source of New Zealand’s cumulative FDI, providing less than 1% of total FDI, the report confirms.

It’s no secret that China’s economic growth has slowed since Covid, with downward pressure on the property market hurting consumer confidence.

China’s tourist numbers to New Zealand are also down over this period.

It is also likely that the foreign buyer ban for residential property has reduced some direct investment.

The report also notes that the United States has overtaken China as the largest source of investor migration applications under the new Active Investor Plus Visa (AIPV) policy.

Chinese Government requirements for time-bound repatriation of personal capital are at odds with New Zealand’s AIPV goals, the report says, but this has not deterred over 30 applications from China since April 1, 2025.

The report concludes that the establishment of the Invest New Zealand agency and proposed changes to the implementation of the Overseas Investment Act present “positive opportunities to refresh the attraction of investment from China”.

In a world of increasing global trade tension, bilateral investment can help to ensure New Zealand’s relationship with China is more than transactional, New Zealand China Council Chair John McKinnon says.

“Increased two-way investment can create long-term partnerships that expand trade and business but also guard against future shocks, increase market knowledge and encourage transfer of innovation and technology.”

Liquidations on the rise

Company liquidations rose 26% year on year, led by the construction sector, according to the latest Centrix credit report.

In the year to July, 765 construction companies were liquidated – up 46% compared to the previous year.

Hospitality is the second-largest industry contributing to company liquidations, with 297 recorded in the past year, up 49% on the prior year.

The data seem to stack up with the anecdotal evidence (and headlines) of the past few months.

Unfortunately, it is often towards the end of an economic cycle that we see the worst of the company failures.

The data did contain some signs of stabilisation.

Business credit defaults were up 8% across the board year on year, although the rate of growth has continued to ease.

The manufacturing industry was the worst hit, with credit defaults up 19% year on year, followed by the property and rental sector, up 13%.

Meanwhile, consumer arrears rose to 12.41% of the credit-active population in July, with 480,000 individuals behind on payments, up 2000 compared with the previous month.

“After six months of improved arrears positions when compared to last year, last month was marginally worse than 2024,” Centrix chief operating officer Monika Lacey said.

“A slight increase in arrears at this time of year is seasonal and expected, potentially due to [the] increased cost of power during the winter months.”

Mortgage arrears improved to 21,200 home loans past due, down 400 from June.

Terms of trade bounce

It’s likely our current account deficit will be smaller than expected when the data are released later this month (September 17).

New data from Stats NZ this week showed the terms of trade lifted in the June quarter.

Meanwhile, revisions to previous months suggested that consumer spending and imports were lower than estimated previously.

That signalled a likely downward revision to the current account deficit, Westpac senior economist Darren Gibbs said.

“The downward revision to imports is expected to reduce the current account deficit by about 0.5% of GDP (from 5.7% in March 2025),” Gibbs said.

“Additionally, the upward revisions to net exports of services reported [on Tuesday] will also help.”

This is more good news for those who worried about the current account deficit in 2023, when it reached 8.8% of GDP (Gross Domestic Product).

Anything above 10% is considered a bad look for a country our size and might have seen us cop a credit downgrade – pushing up borrowing costs (which can become a downward spiral).

But the current account deficit has improved slowly as tourism earnings have rebounded and commodity export prices have boomed.

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. To sign up to his weekly newsletter, click on your user profile at nzherald.co.nz and select “My newsletters”. For a step-by-step guide, click here. If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.