Reserve Bank cuts OCR to 1 per cent, major banks lower mortgage rates

ASB bank is the first bank to cut its home loan rates in the wake of the Official Cash Rate cut. Photo / File

In a surprise move, the Reserve Bank has cut its official cash rate by half a percentage point to 1.0 per cent.

Market expectations were for a 25 basis point cut.

Mortgage interest rates are already at record lows and look set to push lower still.

Four major banks have announced cuts to home loan and savings rates in the wake of the Reserve Bank's official cash rate cut.

The Reserve Bank has been loosening monetary conditions since June 2014, when it cut the official cash rate (OCR) to 3.25 per cent.

The New Zealand dollar dropped by US1c to US64.5c in response to today's announcement.

The bank said its monetary policy committee agreed that a lower OCR is necessary to continue to meet its employment and inflation objectives.

"Employment is around its maximum sustainable level, while inflation remains within our target range but below the 2 percent mid-point. Recent data recording improved employment and wage growth is welcome," it said.

GDP growth had slowed over the past year and growth headwinds are rising. In the absence of additional monetary stimulus, employment and inflation would likely ease relative to our targets.

"Global economic activity continues to weaken, easing demand for New Zealand's goods and services," the bank said.

"Heightened uncertainty and declining international trade have contributed to lower trading-partner growth," it said in a statement.

The bank noted central banks around the world were cutting rates to support their economies.

In New Zealand, low-interest rates and increased government spending will support a pick-up in demand over the coming year, it said.

Business investment is expected to rise given low-interest rates and some ongoing capacity constraints. Increased construction activity also contributes to the pick-up in demand.

"Our actions today demonstrate our ongoing commitment to ensure inflation increases to the mid-point of the target range, and employment remains around its maximum sustainable level," the bank said.

Changes to the central bank's forecasts also show a chance for another cut as the forecast interest rate track eases to 0.9 per cent in late 2020. The prior monetary statement in May showed the OCR tracking going from 1.7 per cent to 1.4 per cent in March 2020 before lifting in late 2021.

The "RBNZ's OCR forecast now has a low of 0.9 per cent, still implying an easing bias. The meeting minutes and statement were less clear on the need for further action, but continued to note downside risks," said ASB Bank chief economist Nick Tuffley.

Tuffley said even after today's surprisingly big cut in New Zealand "the risks remain skewed to an even lower trough than the current 1 per cent OCR. We forecast a further 25 basis point cut to 0.75 per cent, in November," he said.