Rate cut designed as “shock treatment” for the economy
The Reserve Bank of New Zealand’s recent decision to reduce the official cash rate (OCR) from 3.00% to 2.50% was widely expected – but the real story lies in what this larger-than-usual move signalled about the economy and the outlook for housing.
Cotality said there was no debate among the Monetary Policy Committee about whether a cut was needed. “The only question was the size and, in the event, they opted for front-loaded easing.”
The Committee made it clear “that economic weakness and spare capacity remain the key concerns”, which is why it’s possible that the inflation rate, currently at 3.0%, could undershoot the 1-3% target band in the future. Therefore, reducing the OCR by 0.50 percentage points was probably “the least-regrets option”, compared to the “more wait-and-see approach” of cutting by 0.25 percentage points.
“Note that the Committee discussed both options but reached a consensus for the larger cut,” Cotality said.
The rate reduction was designed to act as a catalyst for economic recovery, according to Cotality. “We’ll need to see how the economy evolves over the next few weeks, but another fall on 26th November is possible too.”
Housing market reaction likely to be subdued
Cotality said the immediate impact on the property market was likely to be modest.
“After all, the banks had already been cutting their mortgage rates in advance, particularly for one-year fixed loans,” it said. “And although the effects of this will progressively flow through to borrowers in the coming weeks and months, the subdued labour market is the key restraint on the other side of the equation at present – and it will be slower to start improving; maybe not until next year.”
The rate cut should be seen as “the shock treatment required to get everyone back into gear,” according to Cotality.
The recent green shoots in the economy “should emerge fully in 2026, and as unemployment starts to drop again, it seems likely we’ll see house prices rise next year”.
What it means for borrowers
For households, the RBNZ’s decision reinforces the importance of reviewing loan structures. Borrowers on floating or short-term fixed rates are likely to see relief flow through gradually, while those considering refixing may wish to weigh up the benefits of shorter terms versus locking in longer certainty.
Contact me if you’d like advice on how this rate cut could affect your repayments or to review your mortgage structure in light of the changing economic outlook.