This week’s official cash rate (OCR) decision has drawn particular focus amid challenging economic conditions. So, what should we expect?
The Reserve Bank is due to release its latest OCR decision tomorrow (August 14) – and experts are divided on what we’ll likely see.
Some economists are picking a cut in the OCR now, while others are predicting the Reserve Bank will hold the rate and instead signal cuts later in the year.
The current OCR is 5.5% and has been since May last year. The Reserve Bank began lifting the OCR from its record low of 0.25% in 2021 in response to rising inflation and an overheating economy following the disruptions of the Covid-19 pandemic.
New Zealand’s inflation peaked at 7.3% in June 2022 but is sitting at 3.3% this year – close to the Reserve Bank’s set target of keeping inflation between 1% and 3%.
The banks picking a cut in the OCR this week
ASB
ASB is tipping the Reserve Bank will cut the OCR by 25 basis points at this week’s meeting. It said it expects further cuts of 25 basis points at subsequent meetings.
“We said a few weeks ago that if we were the Monetary Policy Committee we would be leaning towards a cut, but that the RBNZ tends to be more deliberate,” ASB said.
“We judge, though, that the RBNZ will have now also reached the point where it too assesses it needs to cut the OCR sooner than later.”
BNZ
BNZ is also tentatively pointing to a drop in the OCR this week.
“In our opinion, the RBNZ has two choices: cut now and build in progressive rate cuts thereafter or wait and, ultimately, risk being forced into a 50 basis point cut in November,” it said.
BNZ said it was therefore shifting its expected first rate cut from November to August – with more cuts to follow.
The bank was more direct in calling for what it thought should happen on Wednesday – an immediate rate cut.
It said the economy was under strain and inflation was controlled.
“The New Zealand economy is buckling under the pressure of extremely tight monetary conditions, slumping net migration, government cutbacks, rising unemployment, reduced investment activity and weak confidence,” it said.
“We strongly advocate that the Bank starts a progressive easing cycle from the August meeting.”
Business Correspondent Katie Bradford takes a look at what it means for households and interest rates. (Source: 1News)
The banks picking the OCR to hold this time
ANZ
ANZ said it expects the OCR to stay at 5.5% this week with potential cuts signalled for later this year.
While it wouldn’t rule out a cut this time, the bank said it still predicted the first OCR cut to come in November.
Westpac
Westpac is also predicting the OCR will hold at its current level this time.
“We think [the Reserve Bank] will be positioning themselves to cut rates in the October and November meetings,” Westpac said.
“They will leave open the option to scale up rate reductions beyond 25 basis points should conditions warrant but will be looking to discourage markets from getting too far ahead of themselves.”
Westpac said it suspected the Reserve Bank would have no fixed view on what would happen in the longer term “given the significant uncertainties ahead”.
Kiwibank
Kiwibank said it’s not convinced the Reserve Bank will cut the OCR this week – but said it should.
“Overly restrictive monetary policy has inflicted much pain and tamed the inflation beast. Households and businesses are struggling,” the bank said.
“Interest rate relief is required, now.”
Kiwibank recommended a cut of 25 basis points with signals of more cuts to come.
“We recommend a cut [this] week, followed by a cut at every meeting until the cash rates hits 2.5%.”
What if there is a cut in the OCR this week?
The general rule of thumb is that banks’ interest rates rise and fall with the ups and downs of the OCR.
This is because adjusting the OCR affects the operating costs for retail banks – and those changes in costs are often passed on to the banks’ customers.
Changes in the OCR also usually impact people with term deposits or savings accounts. People tend to get a better return on these when the OCR is higher.
Retail banks have already begun adjusting their interest rates ahead of this week’s OCR decision. ASB, BNZ, Kiwibank and Westpac announced cuts to their mortgage rates last week, as well as to some term deposit rates.
Westpac NZ general manager of product, sustainability and marketing Sarah Hearn said falling home loan rates were good news for existing homeowners and those looking to buy a house.
“At the same time, we know some savings customers will be watching falling interest rates closely,” she said.
“We strongly encourage customers, whether borrowers or savers, to contact their bank if they have any concerns about their finances.”
What else can we expect?
Let’s not forget the monetary policy statement (MPS) is also being released at this week’s Reserve Bank meeting.
Kiwibank described the MPS as the “economist’s Superbowl”. It’s a quarterly report that details the Reserve Bank’s assessment of the economy and its outlook for inflation and economic growth. The report looks at economic developments globally and locally and explains the Bank’s decisions around the OCR.
The previous MPS was released in May. It signalled OCR cuts weren’t expected until August 2025 – which makes this week’s MPS even more interesting given banks are calling for OCR cuts sooner rather than later.
