In a nutshell:
- The Reserve Bank cut the Official Cash Rate (OCR) by 0.25% on 26 November, taking us down to 2.25%—and most likely bringing us to the bottom of the interest rate cycle.
- With more and more green shoots starting to emerge in the economy, and many households starting to fell the benefit of lower interest rates, the expectation is that this last little bit should be enough to ensure we can all go into next year feeling a bit more positive.
- There's unlikely to be too much movement in interest rates off the back of the news. Floating rates will drop, and short-term rates may come down slightly—but with the banks competing hard on cashbacks at the moment, that's about it.
The Reserve Bank (RBNZ) cut the Official Cash Rate (OCR) by a further 0.25% on 26 November, down to 2.25%.
It’s exactly what the market was expecting, which is as it should be.
(Things were a bit disconnected for a while there—the left hand didn’t really know what the right hand was doing—but ideally there shouldn’t ever be any big surprises with this stuff.)
And given the state of things, I think it was the right call.
The economy’s not exactly in terrible shape—agriculture’s booming, exports generally are doing well courtesy of the weak NZD, and more and more of us are now starting to feel the benefit of lower interest rates.
But consumer confidence is still in the negatives—down again in October after a brief uptick in September—and that’s the big thing that needs to change before people feel comfortable going out and spending money again.
This final little bit of relief (plus the prospect of a summer break just around the corner) should help with that.
What’s the outlook on the OCR from here?
At this stage, the RBNZ's forecast hasn't explicitly factored in any further cuts next year—although it’s reserving the right to change its mind on that, depending on how the data plays out over summer.
But to me, it feels safe to say we’re at the bottom.
Our next OCR decision isn’t until 18 February 2026, which is a decent way off, even in economic terms.
With the green shoots we’re seeing out there already, and mortgage rates likely trending a bit further downwards, by the time we come back from break next year I suspect we’ll all be feeling a lot more positive about things.
What does this week’s OCR result mean for mortgage rates?
Floating rates will drop off the back of this week’s verdict, and short-term rates could come down slightly too, but don’t expect much more than that.
Eagle-eyed borrowers will have noticed that this time round, the banks haven’t come out with the same preemptive rate cuts they did in the lead-up to our last couple of OCR announcements.
And what that really tells us is that the banks aren’t expecting any further reductions either.
Assuming this is the bottom, the last thing they’d want to do is drop their rates—and squeeze their margins—only to have to turn around and bump them back up again in the not-too-distant future. That’s not a good look for anyone.
The other spanner in the works as far as rate cuts are concerned is that the banks are playing incredibly hard on cashbacks right now.
We’ve got three major lenders all offering 1.50%, which is insane when you consider the going rate is usually somewhere between 0.70% and 1.00%.
Now, the reason the banks are doing this is because not only are big cashbacks a really effective way of winning and retaining customers, but they’re also a whole lot cheaper than the alternative i.e. competing on rates.
The explanation is a little convoluted, but bear with me.
- It means they’re targeting a much smaller portion of the market—i.e. the 5-10% of customers who are refinancing or repricing at any given moment—rather than mortgage borrowers across the board.
- Cashbacks are paid upfront, but then become a liability on the banks' balance sheet which they can amortise over three or four years. Over four years, that 1.50% cashback translates to a roughly 0.40% discount per year, across that 5-10% of the market.
- Compare that with the cost of even a 0.20% discount across the entire market—and there’s a pretty clear winner.
The obvious implication for borrowers is that if lenders have chosen cashbacks as the key battleground for new customers—which it looks like they have—they’re probably not going to go all out on rates as well.
All that said, bank margins are running pretty high at the moment.
With the one-year wholesale rate currently just over 2.40%, and the main banks all offering a headline one-year rate of 4.49%, they’re operating above the upper limit of the usual 1.70% to 2.00% range.
Depending on how competitive they're willing to get—and if that competition does spill over from cashbacks into mortgage rates—there could be scope for that one-year rate to get down a bit lower, potentially to between 4.10% and 4.29%.
From there, whether or not anyone takes the bait, and just can’t resist the temptation of offering a one-year rate of 3.99%, remains to be seen.
It's all very much hypothetical at this stage, though, and will largely depend on how the banks choose to play things once these current cashback deals expire, which at this stage is mid-December.
About the author: John Bolton (JB), Squirrel Founder & Group Head of Property Finance