The Reserve Bank (RBNZ) delivered exactly the result we were expecting on 19 February, cutting the Official Cash Rate (OCR) by a further 0.50% from 4.25% to 3.75%.
As part of the announcement we also got the RBNZ’s updated interest rate forecast, which now has it getting us back to a ‘neutral’ OCR of around 3% sometime in late-2025—significantly earlier than its previous mid- to late-2026 timing.
While the impact on longer-term rates will be fairly muted, short-term wholesale are expected to fall off the back of the news, although it will take some time for that to translate through to mortgage rates in market.
Once competition has started to heat up among the banks (likely by early March) we should start to see six-month and one-year rates edge closer to that 5% mark, with the one-year rate predicted to land somewhere around 5.19%.
What does this latest OCR news mean for New Zealand’s economy?
Falling interest rates will help—and we are starting to see some green shoots out there in certain sectors—but you have to remember that the economy’s coming off a pretty weak base, and there’s no silver bullet for that.
In addition to higher mortgage costs, Kiwi have had to contend with higher rates, insurance, food, transport and travel costs as well. There are a whole lot of things eating into people’s discretionary income.
So, it’s going to take some time for households and businesses to rebuild their balance sheets after the damage done over the last couple of years. And only once people have built up their confidence again—which is unlikely to happen anytime in the near-term—will there start to be any real recovery in spending and investment.
Although the government’s pushing a big growth agenda at the moment, the measures it’s proposing (like opening up immigration and lowering corporate taxes) are just the typical short-term fixes. They’re not going to lead to the sort of high-quality economic growth we really want i.e. per capita GDP growth, which leaves people feeling generally better off.
To get to that point, we’ll need to address bigger, more fundamental problems llike productivity and innovation—and that sort of thing takes time and a dedicated strategy.
It’s likely to be a pretty benign environment for at least the next two to three years. Things will get better, but don’t expect the economy to take off in a big way any time soon.
And what’s happening in the housing market?
Lower interest rates are making a difference, and we’ve been seeing a lot more buyer activity out there in recent weeks.
But sellers have also been coming to the market in huge numbers, with new listing levels have hit a 10-year peak in January—which means it’s very much a buyer’s market at the moment. Stock levels are high, and buyers are spoilt for choice, so vendors still need to be realistic in their price expectations.
So, while this latest OCR cut should help to bring a bit more stability, any meaningful recovery in house prices is unlikely until sometime in 2026, once interest rate and economic conditions have significantly improved.
Check in again next week for our latest update on New Zealand interest rates.
