On 9th October, the Reserve Bank (RBNZ) did the unthinkable—delivering a 0.50% drop to the Official Cash Rate (OCR), cutting it to 4.75%.
It’s the result we’d all been hoping for in recent weeks, and should mean greener shoots are on the way.
There’s been some criticism of the Guv’nor (RBNZ Governor Adrian Orr, that is) of late, saying that he’s overcooked interest rate increases this time round. In his defence, though, it’s not easy to get it right 100% of the time—but the expectation he faces are high.
What’s behind the RBNZ’s latest OCR decision?
We haven’t had a whole lot of new tangible information come out since our last OCR announcement on 14th August.
Net migration numbers have tailed off, business confidence still isn’t great, and there are predictions of employment rates getting up to 6%, which is higher than where they want them to be.
What’s changed is the fact that the RBNZ seems to be putting a little more stock in those numbers than it has previously, moving away from its earlier approach of focusing heavily on inflation and GDP data, much of which is dated and backward-looking.
To continue with the prior ‘slow and steady’ trajectory—delaying relief further than necessary—would’ve forced the RBNZ to make some very aggressive cuts in the future, which is not how you want to manage the NZ economy.
Towards the middle of October, we’ll have migration numbers confirmed, rental index data, house price data, and electronic card transaction info (along with other info). These numbers should give us a clear indication of whether the RBNZ has made the right call this time round, but I think we know the answer to that question!
What does it all mean for interest rates?
The news is favourable.
Over the last fortnight or so, we’ve seen the banks inch down slightly on their short-term rates—by circa 0.15%—in anticipation of this latest drop.
That means we may only see a further reduction of around 0.25% to short-term rates from here, but floating rates will possibly come down further than that.
Bank margins on funding however are still large, so lenders have room to pass on larger cuts should they choose. Hopefully it will be a similar story for the next review come November too!
What’s the outlook on rates from here?
We’re going to see continued interest rate reductions for a while yet, regardless—it’s the pace of those reductions that everyone’s wondering about.
As we saw when interest rates were on the way up, it takes a while for OCR changes to flow through to the wider economy, but market sentiment and business confidence is something that should be watched and measured closely.
I try to present a balanced viewpoint, so it’s worth noting we’ve still got some hurdles facing us for 2025, meaning it’s not all beer and skittles yet.
The Chinese economy is still off the boil, housing construction likely won’t recover until the second half of 2025, tourism isn’t what it used to be, Government spending is muted, job security (especially in the Capital) is questionable, and the list goes on.
Still, you have to celebrate the wins as they come, and if things play out as hoped, we should see continued jumps down the interest rate scale from here, starting with another 0.50% reduction in November.
Will make for a better end of year party no doubt!