RBNZ slashes OCR but is this the last cut to come?

The Reserve Bank trimmed the Official Cash Rate by 25 basis points in November bringing it down to 2.25% - the lowest level since mid-2022. The widely anticipated move came against a backdrop of cooling inflation and a fragile economy, as the central bank signalled that the easing cycle could be nearing its end.

The RBNZ says the cut should help support household and business spending, but its next decision in February will hinge on how inflation and economic activity evolve over the coming months.

While all eyes were on the current rate announcement Kiwibank Senior Economist Mary Jo Vergara says what many were also paying attention to was the Reserve Bank’s predicted track, forecasting the OCR to bottom out at 2.2% next year - a lot higher than expected.

“The market was expecting they would lower their track to about 2.15% which would be a 50/50 chance that they'd cut again in February next year. But they lowered it five base points higher.”

“That's why we saw quite a reaction in interest rates and wholesale interest rates which lifted off the back of that.”

She says the Reserve Bank was a lot more upbeat about the economy than expected.

“A 25 basis point cut is what we expected, but what we were really waiting for was what they were going to signal, and they came back a little bit more optimistic. “

“We probably would have taken that stance as well, but not until February. I think we would have wanted to see how the summer plays out first especially since there’s such a big gap in between then and now.”

WHAT CAN WE EXPECT FROM INFLATION?

New Zealand's annual inflation is currently sitting at 3.0% and right on the edge of the Reserve Bank’s target band, up from 2.7% in the June quarter.

“It does look frustratingly high, but if you look at what's driving that, a lot of it has been temporary things or things outside of the Reserve Bank’s control, like food prices, council rates and electricity bills. All of that is largely seasonal, and so we expect them to drop away.”

“We do see inflation returning to that 2% target next year, and potentially falling below that, because the economy is so weak right now.”

Vergara says there’s even a risk inflation could fall below that, which would require the Reserve Bank to step in with even more stimulus.

WHY IS IT TAKING SO LONG TO KICK START THE ECONOMY?

Vergara says right now there’s a large gap between sentiment and the stats.

“This is really where the Reserve Bank had to step in. They are the ones that can boost confidence to meet the statistics, because confidence really does come before any activity.”

“Businesses have to feel confident in their outlook before they start investing again, and households have to feel confident about their own position, and financial position before they can start spending.”

That’s why Vergara says Kiwibank was advocating for a 50 basis point cut in November.

“It would have been nice to see a 50 just to fuel that confidence going into next year, because there are still so many risks, especially with what's going on overseas.”

“We were talking about green shoots this time last year, but we didn't know that Trump would come out with those tariffs. So there are always these risks playing out in the background.”

WHAT WILL THIS MEAN FOR INTEREST RATES?

Vergara says around 40% of mortgage holders are due to refix in the next 6 months, and she believes that now could be the time to consider fixing for longer.

“I think retail rates are probably close to their low, especially with the cash rate potentially bottoming out as well.”

“We’ve also seen wholesale rates move a little bit higher. Banks do have a bit of margin, but that move in wholesale rates is starting to eat away at that.”

She says that won’t mean rates will start to increase, but it does mean that it could be on the distant horizon.

“I still think that's kind of an end of next year, probably the start of 2027 kind of story.”

However Vergara believes that doesn’t mean that competition between lenders won’t come into play.

“That's probably fair, but I think the main message is that most of the move in interest rates has been done, and we're probably arguing over the next 10 basis points or so.”

WHAT’S GOING TO HAPPEN WITH SUPPLY AND PRICING?

Falling interest rates have made it cheaper to borrow money and easier to buy a house, but right now that demand is being offset by an oversupply of listings.

“There are so many open homes and listings coming up, but also population growth has weakened a lot. Those things are really keeping a lid on house price growth.”

Vergara says the good news is that next year it’s looking like investors will start to re-enter the market.

“They're really the missing piece of the puzzle, and the fact that they're coming back into the market should see house prices grow by about 2 - 3% next year.”

The only thing that could affect that is next year’s upcoming election.

“It’s a tricky time with the election cycle coming back up, and usually people do stay quite cautious in the couple of months leading up to the election.”

“We're already hearing that investors are sitting on their hands now, which a whole year out is just going to delay the recovery even further.”

COULD ANYTHING ELSE DELAY OUR RECOVERY?

Vergara says the biggest risks come from geopolitical factors.

“Something like another Liberation Day, and I think there are a lot of other global risks still out there too.”

“I think that this summer period will tell us a lot. But what we worry about is the fact that our economy is so seasonal. Where we'll see a big pickup, just as we saw last year, then that can quickly kind of die away. We need to see something that's a bit more sustained.”

While the latest OCR cut offers a welcome nudge for borrowers and businesses, it is only one piece of New Zealand’s wider path back to economic stability.

The real test will now come in how confidently households spend, how resilient employers remain, and how quickly inflation settles into a sustainable groove. If these ingredients align, this moment may be remembered not just as a rate adjustment, but as an early step in a steadier, more predictable recovery.