OCR & interest rates update – February 2025

Sticking to the game plan it laid out for us late last year, the Reserve Bank (RBNZ) cut the Official Cash Rate (OCR) by another 0.50% on 19 February, taking it from 4.25% down to 3.75%. 

The most interesting thing about the announcement was the RBNZ’s revised interest rate forecast, looking out to the year ahead. It’s now working to get us back to a ‘neutral’ OCR of around 3% by late 2025, significantly earlier than the mid- to late-2026 date previously given. 

It’s the outcome the market was broadly expecting, and, to me, it feels like the right call given how things are tracking with our economy at the moment. 

Anything less would have set us on a too-slow path back to a ‘neutral’, while anything more would have felt like it was taking things too far.

In terms of what the news means for mortgage rates, the decrease was already largely priced into the rates we’ve been seeing in market over the last few weeks.

Short-term rates should have a little further to fall off the back of the news—and that should happen relatively quickly—but I’m not expecting to see the banks come out swinging with big cuts until competition heats up a little bit. 

If I were fixing or refixing right now, I’d give it a couple of weeks to let that happen (just hanging out on a floating rate in the meantime) and hopefully by early March we should be starting to see one-year fixed rates down a bit closer to 5%. 

How are things looking out in the economy?

The thing with recessions is that they’re cyclical in nature i.e. they don’t last forever. You’ve got to come out of the bottom of the cycle eventually. 

While our economic news still isn’t great, it also (for the first time in a long time) doesn’t appear to be getting any worse. And in fact, earlier this month, we actually had some slightly positive numbers come out of our manufacturing and trucking sectors. 

So, we’re finally starting to see some signs of life out there—which is great—but it’s not the start of some miraculous recovery. 

The combined impact of high interest rates, falling house prices, low confidence and reduced job security over the last few years has left many reeling. It’s going to take a while for consumers and businesses to rebuild their finances and get to a point where we’re comfortable going out and making big purchases again, which will be a crucial part of the equation for getting our economy back on track.

I’d caution against getting too caught up in all the government’s talk about their big growth agenda for 2025. I’m not a fan of quick-fix solutions, such as lowering the company tax rate or unbridled immigration. They’re just sticky-tape over bigger structural issues (like innovation and productivity) that need to be solved to get NZ ahead. 

The sort of strong foundational growth it takes to become a high-skill, high-income economy takes years of discipline and process. It’s a slow and steady recovery in front of us. 

How does what's happening at an international level impact us here in New Zealand?

The biggest potential cause for concern here is the flow-on effect of Trump’s various trade policies for the global economy.  

The argument is that increased inflation in the US will force the Federal Reserve to keep interest rates higher for longer—prompting other central banks around the world to hold rates up to defend their currencies against a stronger US dollar. 

In my view, the likelihood of that trickling through to higher interest rates in New Zealand is limited, because most of our major trading partners (predominantly based throughout Asia/Pacific) are in the same predicament.

On the export front, there is something of a risk that Trump could decide to slap a trade tariff on New Zealand goods, but a lower NZ dollar would offset that and work in our favour. 

So, to me, international politics is a riveting distraction, but I don’t see huge cause for concern in terms of the implications for our economic recovery. 

We’re fundamentally a low-growth economy, largely built on doing the basics (i.e. food production and commodities) and doing them well. It’s not sexy, but it does help to protect us from some of the volatility that other economies are facing. People always need food.

I’m not saying we’ll get off scot-free—we’re a small country in a big world, so of course we’ll feel it in some way—but I think we’ve already had a fairly large dose of the medicine.

What's been happening in the housing market?

Levels of buyer activity have kicked up another notch in the wake of November’s OCR cut. Anecdotal evidence from vendors is that they’re getting more people through the door at open homes, and turnover has increased—so things are warming up. 

But there’s still a huge glut of listings out there—national listing numbers having hit a 10-year peak in January—meaning it’s very much a buyer’s market, and vendors need to be realistic around their price expectations. 

While falling interest rates will help, there are still a whole lot of other things (higher rates, insurance, food and travel costs) eating into people’s discretionary income, meaning affordability still just isn’t there. 

As long as that’s the case, and as long as stock levels remain high, there’s unlikely to be any meaningful recovery in house prices. The market should stabilise a little further off the back of this latest OCR cut, but I’m not expecting to see too much more than that.