Watch David's latest market update below, or keep scrolling to read the full article:
As the old saying goes, it’s always darkest before dawn. And while things feel pretty dark out there at the moment, we are starting to see some light on the horizon.
Here’s the latest on what’s been happening with the OCR and interest rates, house prices and the New Zealand economy over the last few weeks.
First thing's first...what to make of the RBNZ's latest OCR commentary?
The Reserve Bank has pulled some pretty spectacular 180s in its time—and its latest Official Cash Rate (OCR) announcement on 20 August was right up there with the best of them.
If you’ll recall, it’s been pretty adamant the whole way through this latest series of rate cuts that around 3.00% (the middle of their estimated ‘neutral’ range for the OCR) was where they’d take the OCR in this cycle.
And even as recently as last month, it was in no hurry to get us there. Instead, it held the OCR at 3.25%, citing concerns around inflation and a desire to ‘wait and see’ how previous rate cuts flowed through before making any big moves.
So what it came out with on 20 August surprised most market watchers.
The 0.25% OCR cut to 3.00% was widely expected. What wasn’t is the fact that two members of the RBNZ Monetary Policy Committee actually wanted to go bigger—0.50%, and that the RBNZ has now revised its forecasted OCR track to a low of 2.50%.
The driver of this change of heart was their latest GDP forecast (the inflation-adjusted size of the economy) for the June 2025 quarter. In stark contrast to its earlier forecast of a 0.3% increase, it’s now forecasting a decline of 0.3%.
Moving forward, the RBNZ's strategy has shifted from 'neutral' to stimulatory
Negative GDP means we’ve got more spare capacity in the economy—i.e. more supply than demand—and while that’s bad news for things like wage growth and unemployment levels, it’s typically good news for inflation.
Despite the fact that inflation has been tracking upwards in recent weeks (and is expected to briefly peak above 3%) the RBNZ now has confidence it will settle back in the middle of their target 1-3% target range in 2026.
And that’s the green light it needed to pursue more stimulatory monetary policy.
As a result, the RBNZ’s updated interest rate forecast now has it (pending further data of course) targeting an additional two OCR cuts, ultimately bringing us down to 2.50% sometime in late 2025 or early 2026.
It’s taken longer than we might’ve hoped—but it’s good to finally see the RBNZ clocking what many of us have been feeling for some time: the economy is in a weak place, and we need a little more than ‘neutral’ rates to help get us back on track.
On that note, why haven't rate cuts to date done the trick?
Given just how much pain Kiwi borrowers have endured over the last few years, we were always in for a long, drawn-out recovery.
The reality is, even with the OCR down over 2% already, all it’s really done is give people (those who have felt the benefit of lower rates already at least) the chance to get out of survival mode and back on a more even keel.
Particularly with global volatility adding to the overall sense of uncertainty, it’s not surprising we haven’t regained the confidence to feel comfortable going out and spending money again.
So, out in the wider economy, the situation is still pretty tough. Key economic indicators like underemployment, concrete production (a good indicator of construction activity), and consumer confidence are all tracking poorly, and have been for some time.
The one exception—the bright spot, if you will—is agriculture. Kiwifruit exports have hit record numbers, our dairy and meat exports are commanding premium prices and production volumes are strong. Even US trade tariffs don’t appear to be having a dampening effect.
The benefit of that will trickle through to the rest of us eventually, it’s just going to take some time to get there.
What's the outlook for interest rates?
Floating mortgage rates are always quick to reflect OCR changes—so floating rate customers are already enjoying most of the benefit of the latest 0.25% OCR drop.
On the fixed rate side of the equation, it’s what the RBNZ plans to do next that makes all the difference. And with the OCR now expected to bottom out about 0.25% below what the market had been pricing in, it’s good news.
Wholesale rates have fallen between 0.15% and 0.20% in the wake of the announcement—creating room for the banks to drop their one-, two- and three-year terms a little further.
It won’t happen overnight, but we should see that gradually filter through to rates in market over the next couple of months. We think this will take the one-year and possibly the two-year fixed rates down to somewhere between 4.50% and 4.60%.
Unfortunately, on the flip side, it does also means that saving interest rates will continue to track downwards as well, settling around 3% for term investments and lower for savings accounts.
The housing market isn't going anywhere in a hurry
At the end of the day, lower interest rates make it cheaper to borrow—so, yes, this latest cut will drive a bit more buyer activity, but not enough to see the housing market take off again in the near-term.
Oversupply is still a big issue—oh, the irony, given the housing crisis mantra of recent years—thanks to immigration sitting at near zero, and waves of development projects started 2-3 years ago now hitting the market. And prices have softened in recent months as a result.
Until we start to see a lot more strength in the economy, which could take a good couple of years, the housing market trajectory is sideways rather than up.
Still, with more rate cuts ahead and mortgage rates gradually easing towards 4.5%, we should see the economy continue its gradual return to life over the remainder of this year and into 2026.
It’s going to be a slow recovery, but the thaw is on its way.