Editorial: Politicians quick to grasp at positive news but cash rate cut signals tough times still ahead

Prime Minister Christopher Luxon spoke about the Official Cash Rate cut before the Reserve Bank had time to talk about the decision. Photo / Getty Images

Editorial

The Reserve Bank’s 50-basis-point cut to the Official Cash Rate on Wednesday was quickly leaped on by both the politicians and the banks as a way to convey positive news – but the forecasts from the central bank don’t paint a rosy picture.

Within minutes of the Reserve Bank announcing the cut, banks were touting cuts to floating rates, declaring that thousands of borrowers would benefit. But most New Zealanders are on fixed-rate mortgage terms.

Some banks – ANZ and Westpac – have trimmed a little bit off their fixed rates. But so far, no banks have passed through the full 50 basis points from this cut to fixed-term rates.

Finance Minister Nicola Willis and Prime Minister Christopher Luxon, who held a press conference before the Reserve Bank even had a chance to explain its decision, were quick to declare that it would provide more relief for Kiwis’ back pockets.

But if banks don’t pass on some of the cut to fixed-term rates, the relief will be limited. Politicians should also bear in mind that the rate is being cut because New Zealand is likely in its third recession in two years.

Updated forecasts from the Reserve Bank show unemployment is still expected to rise in the near term, with a further 11,000 people expected to be unemployed by March next year.

On top of that, the central bank is forecasting growth to be up just 2% in the 2026 year and 2.4% in 2027, down from previous forecasts of 2.7% and 3.2%, respectively.

Of particular concern is the falling productivity the Reserve Bank is expecting over the coming years.

Reserve Bank Governor Adrian Orr has warned borrowers they should temper their expectations for extremely low rates due to high international borrowing costs.

Even though central banks around the world are cutting interest rates, longer-term sovereign bond yields have jumped.

Investors believe the tax cuts President-elect Donald Trump has promised to deliver in the US will result in the country’s books sinking further into the red. Increased economic uncertainty and higher inflation expectations, on the back of Trump’s tariff threats, have also introduced risk, which investors have priced into longer-term assets.

Higher sovereign bond yields in major economies such as the US affect the interest rates New Zealand banks pay to borrow money from offshore. This ultimately trickles through to the interest rates Kiwis pay.

But bank margins in New Zealand remain high. That means they could absorb some of the higher costs of offshore funding and pass on at least part of the rate cut to borrowers.

Another 50-basis-point cut is expected to be made by the central bank in February.

Politicians would do better to put their energy into applying pressure on the banks to increase competition than patting themselves on the back for a falling OCR.

All eyes will be on the banks in the coming weeks to see if they move and by how much – and if they don’t, what the consequences of that will be.