In a nutshell
- The average home loan interest rate paid by Kiwi households rose by 3.6% between September 2021 and September 2024—leaving many households in survival mode.
- With 2.50% worth of OCR cuts under our belt over the last year, that average interest rate has fallen by 0.75% from its peak, with another 0.75% to come (based on current interest rates).
- But the economy is still ‘in a funk’, because those rate cuts are only just allowing households to start to get back on an even keel.
- Despite the economy being in a deep recession, interest rates settings have been contractionary for almost four years. And we’re just now reaching a neutral level (around 3%).
- With inflation forecast to be back at 2% next year, it is time to slash the OCR to deliver much needed stimulus for the economy.
- The RBNZ should lower the OCR to 2.5% on 8 October and 2.0% on 26 November.
Funk (noun): a temporary state of low spirits, stuck in a gloomy rut.
For almost 18 months, many of us have looked on in dismay at the dire state of New Zealand’s economy and called (increasingly loudly) on the Reserve Bank to please hurry up and deliver much lower interest rates.
And on 20 August—in a verdict we’d all been hoping for, but had doubts would ever actually happen—the RBNZ finally seemed to admit that stimulatory interest rate settings are needed.
It’s now signalling a further 0.50% drop in the Official Cash Rate (OCR) over the next six months—taking the OCR to 2.5%, and likely bringing headline one- and two-year fixed home loan rates below 4.5%.
Perhaps most surprising was the revelation that the RBNZ Monetary Policy Committee had actually voted on whether to cut by 0.25% or 0.50% this time round.
As it was, they decided in favour of a 0.25% cut—four votes to two—but it’s at least a clear sign they now get the urgency (and seriousness) of the situation.
So, why has it taken the RBNZ so long to reach this realisation?
It mistakenly attributed much of the weakness we’ve seen in the economy—and consumer confidence—over the last few months to the global uncertainty created by Trump’s ongoing trade tariff noise.
But as it’s become clear that the 2.50% of OCR cuts we’ve had so far in this cycle have done very little to get households out and spending again, it’s been forced to reevaluate.
The big driver behind the RBNZ’s about-turn this month has been a change in the forecast for surplus capacity in the economy, which is naturally disinflationary.
Back in May, it was anticipating positive 0.3% economic (GDP) growth in the June 2025 quarter. But off the back of a slew of negative economic indicators, the RBNZ is now forecasting negative 0.3%.
As a side note, what *is* behind the lack of recovery in household spending?
It has its roots in the over-tightening of interest rates which took place between November 2021, when the OCR was at 0.25%, and May 2023, when it peaked at 5.50%. And there it stayed until August 2024.
Before that final OCR hike, Squirrel released an Open Letter to RBNZ Governor, Adrian Orr, imploring him to call time on any further increases.
Our argument was that after 5% of OCR hikes (which ultimately pushed up the average home loan rate Kiwis were paying from 2.8% to 6.4%), households were already in survival mode.
At Squirrel, every day we saw our customers doing what they could just to stay afloat. Reducing spending. Eating into savings. Using up the buffers they had in their home loans. Switching lenders to take advantage of cashback deals, just so they could survive.
In other words, we were all stuck in a massive *funk*.
So, what’s happened since then?
Over the last year, the RBNZ has delivered 2.5% worth of OCR cuts.
But the prevalence of fixed-rate home loans in New Zealand means it’s taking a while for borrowers to feel the benefit.
So far, the average mortgage rate Kiwi are paying has fallen by just 0.75% (to 5.6%) with another 0.75% reduction in the pipeline over the next six months.
All up, that’s 1.5%, which—while better than nothing—is still less than half of the 3.6% increase we endured.
The reasons that this reduction hasn’t provided any apparent stimulus to the economy so far are two-fold.
Firstly, before you can go forwards, you have to stop going backwards. The rate cuts we’ve had to date are simply helping Kiwi households to get back on a more even footing after the backslide of the last few years.
Secondly, when things are tough for as long as they have been, it creates a nasty downward spiral.
A weak economy (a.k.a. recession) = uncertainty for households (“will I lose my job?”) = challenging times for businesses (e.g. no one seems to be spending) = emigration (“things are better overseas than in NZ”) and lower immigration (“why would I move to a country in recession?”).
There is one bright spot: the strength of the agricultural sector due to booming prices and demand for the likes of milk products, beef and fruit exports.
But that’s not enough to get us out of the *funk* we’re in.
How do we escape this *funk*?
It’s pretty simple.
When an economy is in recession, a central bank should be providing as much stimulus as needed to get things back on track.
The RBNZ says a “neutral” OCR ('not too hot, not too cold') is around 3%. So why the heck are we at 3% today when the economy is in such a weak state?
In my mind, an appropriate monetary policy response is to lower the OCR to 2.5% at the October review, and to 2.0% at the November review.
Then let the magic of lower interest rates do their job.
It’s the RBNZ’s obligation to New Zealanders to act swiftly.
A stimulatory OCR will boost the nation’s morale, increase household spending, encourage business investment, create jobs, stimulate immigration, retain talented Kiwi in New Zealand, and foster a more prosperous future.
In short, it’s exactly what we need to un-funk New Zealand.
Footnote: Although the RBNZ’s role is to keep inflation in a 1% to 3% band over the economic cycle, that doesn’t have to mean killing the economy.