The Reserve Bank is confident lower interest rates will eventually help the sluggish economy perk up.
It has identified numerous reasons why the 250 basis points of Official Cash Rate (OCR) cuts it has delivered in a year haven’t spurred as much growth as some expected.
This said, chief economist Paul Conway reminded those at a press conference on Wednesday afternoon that the Reserve Bank is responsible for maintaining price stability, not growing the economy.
“If we want to get growth going forward in the long run, then it’s about improving productivity in this economy,” he said.
“Monetary policy is not the instrument for that. We’re about controlling demand to keep inflation low and stable. There is only so much we can do.”
Conway’s comments came as the Reserve Bank’s Monetary Policy Committee cut the OCR by an expected 25bps to 3% – a rate broadly deemed to be neither contractionary nor stimulatory.
The committee surprised observers by taking a firmly dovish tilt, pencilling in two more cuts, which would take the rate to 2.5% by March. Two of its six members also wanted to cut the OCR by 50bps.
There had been calls by some economists and those in the business community for the Reserve Bank to try to fire up the economy by slashing the rate by 50bps on Wednesday.
Notwithstanding the fact it takes about 18 months for OCR changes to filter through the economy, the Reserve Bank provided a few reasons in its statement for the lag currently being experienced.
It noted mortgage holders have largely been putting their loans on floating interest rates, or fixing for shorter durations, with the aim of locking in rates for longer terms once they fall further.
The pinch is, borrowers can be left paying a premium for these floating or shorter-term rates, limiting the amount of interest rate relief they experience.
Reserve Bank assistant governor Karen Silk has for some months been expecting more borrowers to secure rates for longer durations.
However, the latest available data shows 73% of mortgage debt taken out in June was still floating or fixed for a year or less. In November last year, this portion sat at 94%.
The average rate paid on the country’s stock of mortgage debt was still relatively hight at 5.66% in June. This figure only peaked in October last year, at 6.39%.
Silk suggested another reason why the effects of a lower OCR are taking a while to provide households with relief is the high cost of essential items.
Food, electricity, council rates and insurance are still rising rapidly, above the general rate of inflation, which came in at 2.7%, on an annual basis, in the June quarter and is expected to rise to 3% in the September quarter.
This is eating into households’ disposable incomes at a time wage growth is weak.
Indeed, the Reserve Bank said people’s real incomes have been sliding since 2021.
Then there is the issue of the wealth effect – people spending less when their house values fall.
The depressed housing market has dampened consumption and investment in the building of new homes.
Furthermore, annual net immigration has fallen from a peak of around 2.6% of the working-age population in mid-2023 to around 0.2% in mid-2025.
Asked whether the Reserve Bank’s decision to keep the OCR on hold in July had made the economic situation worse, acting Governor Christian Hawkesby said: “That’s not my assessment. We always make our decisions based on the information that we have available at the time.
“In July, we did talk about our openness to lower interest rates... now we have followed through on that.”
When the Monetary Policy Committee met in both July and May, it was wary of the risk that tariffs imposed by the US could spur inflation. Like some other central banks, it decided to take a “wait and see” approach in July.
Come Wednesday, Hawkesby leaned into the fact the market reacted strongly to the Reserve Bank signalling further OCR cuts.
He was “comfortable” with both the New Zealand dollar and swap rates falling, acknowledging this would see the market “start moving for us in terms of providing that additional easing in monetary conditions”.
Hawkesby was also happy looking through near-term inflationary pressures, as the Reserve Bank is tasked with ensuring inflation remains low and stable in the medium-term.
Looking ahead, the Reserve Bank expects annual consumption growth to increase to almost 3% in 2026 and residential investment to start picking up later this year.
While it believes gross domestic product (GDP) contracted by 0.3% in the June quarter, it sees quarterly GDP growth picking up a little to 0.3% in the September quarter, then rising modestly through 2026.
“Monetary policy is working,” Conway said.
“It is passing through. It’s affecting mortgage rates and deposit rates, and it is showing up on the real side.”
Jenée Tibshraeny is the Herald’s Wellington business editor, based in the parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.