Watch JB's latest OCR analysis below, or keep scrolling to read the full article:
In a nutshell:
- The Reserve Bank cut the OCR by 0.50% on 8 October, taking it down to 2.50%.
- That reduction is already largely priced in, after many banks pre-emptively dropped their short-term fixed rates in the lead-up to the announcement. The one-year rate, now at a really attractive 4.49%, isn't expected to fall much further from here.
- We're now either at or very close to the bottom of the interest rate cycle, with potentially one more 0.25% OCR reduction to come in November.
- The RBNZ's 'neutral' estimate is still 3.00%—and once the economy starts to warm up, borrowers should expect the OCR and short-term rates to track upwards again slightly.
- With two- and three-year rates below 5%, fixing slightly longer-term is a good option for anyone concerned about rate increases, and wanting some certainty over the future.
The Reserve Bank (RBNZ) delivered a bumper Official Cash Rate (OCR) cut on 8 October, dropping it by 50 basis points to 2.50%.
It’s the result the market was expecting, after last month’s dismal GDP result (-0.9% for the June 2025 quarter) left zero doubt that the economy still has a long way to go on its road to recovery.
Wholesale interest rates have fallen roughly quarter of a percent off the back of that GDP news—which, in turn, has prompted all our major banks to pre-emptively cut their short-term interest rates ahead of this week’s verdict.
In other words, this week’s reduction is already largely priced in to fixed rates in market.
The best one-year rate on offer currently is 4.49%, which is a really good rate, and that’s not expected to come down much further (if at all) from here.
This latest OCR outcome should, hopefully🤞🏻, be the shot in the arm we need to get the economy back on track.
After coming out all guns blazing early on—delivering back-to-back-to-back 0.50% reductions in October and November 2024, and February 2025—the RBNZ has taken a far more cautious approach to interest rate cuts in recent months.
That’s because, now that we’re seeing a few green shoots starting to emerge (agriculture in particular being the star performer), it’s been terrified that it might overstimulate the economy and send inflation skyrocketing again.
But the truth is (and excuse the crude analogy here) when you almost kill the patient, there’s just no way the recovery is going to be easy.
Until now—even in the face of a long string of weak economic data (GDP, business confidence, consumer confidence, unemployment)—I don’t think the RBNZ has fully grasped the extent of the damage done to Kiwi businesses and households by holding interest rates as high as it did for so long.
We were flatlining for a bit there.
Now, part of the problem is that the RBNZ is always a bit slow to catch on and react to the reality of what’s happening. It’s very much playing to its track record.
But the other part is down to the fact that we’re in uncharted territory.
In past recessions, interest rate cuts have generally been pretty quick to flow through and get people confident about going out and spending again—and I think the RBNZ was banking on that being the case this time round, too.
What it hadn’t factored into the equation is the record amount of debt we took on during COVID (tempted by mortgage rates down around 2.50%), and the fact that would leave us all feeling the pain of rate hikes much more acutely than ever before.
So, while we are starting to see a few more signs of life out there—and things will continue to track in the right direction as more of us benefit from lower rates—the economy’s still got a bit of a hospital stay ahead.
It arguably should have happened sooner, but it’s good to finally see a bit more urgency from the RBNZ in the effort to get us back on our feet.
What’s the outlook on the OCR and economy from here?
If we’re not at the bottom of the interest rate cycle already, we’re extremely close.
We’ve got our next OCR announcement, the final one for the year, coming up in seven weeks’ time on 26 November.
Depending on how the data plays out between now and then (i.e. if it’s still looking grim) there’s a chance we could get one further, small reduction, taking us down to 2.25% heading into Christmas.
That said, seven weeks isn’t really long enough to get a gauge on anything as far as the economy is concerned.
So, equally, I wouldn’t be surprised if the RBNZ decided to hold at 2.50% instead and just trust that this latest reduction will work its magic.
Either way, wherever the OCR lands in November—be it 2.50% or 2.25%—I suspect that’ll be the end of interest rate cuts for this cycle.
Because, while things still don’t feel great out there right now, there is some cause for optimism.
The weak NZD should do us some favours in terms of attracting more international tourists (especially from across the ditch)—which will be good news for hospitality and retail—while also helping to fuel export growth.
And as rate reductions continue to flow through, leaving people with a little bit more cash in their back pockets, my pick is that by the time summer rolls around, we should all be feeling a lot more confident.
It’s worth noting that the RBNZ’s estimated ‘neutral’ point hasn’t changed, still at 3.00%, meaning we’ve now officially tipped into stimulatory territory.
It’s what needed to happen to kickstart economy again, but it won’t be forever.
Once things start to warm up, borrowers should expect to see the OCR gravitate back towards and settle at around the 3.00% mark.
Right now, anyone fixing for a year at 4.49% should do so with the understanding that, when that loan matures in 12 months’ time, there’s a good chance they’ll be rolling off onto a slightly higher rate.
With the two-year rate down around 4.65% and the three-year between 4.85% and 4.89%, those are attractive alternatives for anyone worried about the risk of rates climbing again and just wanting a bit more certainty over the future.