The official cash rate (OCR) will be cut to 5.25%, the Reserve Bank has revealed, after weeks of speculation it could be dropped for the first time in four years.
After two years of trying to tame inflation, the bank’s monetary policy committee made the call amid growing unemployment and poor economic growth.
Kiwibank has become the first bank to instantly respond to the OCR cut, decreasing its variable home loan and business lending rates by 0.25%, as well as cutting some deposit rates. It was quickly followed by ASB and ANZ in adjusting some rates.
Finally there is a little joy for mortgage holders and business owners, Katie Bradford reports. (Source: 1News)
Before the announcement, several economists said they believed now was right to drop the OCR, with data showing the annual rate of inflation falling to 3.3% last month.
The Reserve Bank’s target range for inflation is between one and three per cent. The central bank’s monetary policy committee explained its decision.
“The committee noted that the weakening in domestic economic activity observed in the July monetary policy review has become more pronounced and broad-based.
“Headline inflation has declined, and business inflation expectations have returned to around 2% at medium- and longer-term horizons.
“Committee members agreed that monetary policy restraint can now begin to ease.
“The pace of loosening will depend on the extent to which price-setting behaviour continues to adapt to lower inflation and inflation expectations remain well anchored to the target mid-point. Global growth remains below trend across advanced economies.”
The Reserve Bank also projects the country will be in a technical recession, with negative growth forecasted in both the June and September quarter.
The OCR reached its peak of 5.5% in May last year, after successive rises since late 2021.
Bank cuts interest rates immediately
Three minutes after the Reserve Bank’s decision was announced, Kiwibank became the first bank to cut some interest rates in response.
ASB followed suit, dropping all rates across its fixed and floating mortgage rates.
ANZ and Westpac have also made cuts to its floating and flexible home loan rates.
Kiwibank chief business customer officer Elliot Smith said: “We’re pleased to respond promptly to today’s changes by the Reserve Bank, allowing us to pass on reduced interest rates to our customers.”
“In the current high interest rate environment, we understand that any decrease in lending rates can lead to meaningful savings on loans and mortgages, enhancing affordability and financial flexibility for our customers.”
Willis says hard conditions for businesses ‘easing’
Finance Minister Nicola Willis said the 25 basis point drop would be a “welcome relief”.
“I am pleased the Reserve Bank’s decision to lower the OCR today shows it has confidence that inflation is under control and the era of extreme price increases is over.
“This also means Kiwis will pay less interest on their mortgage loans and on their credit cards. Taken together with our recent tax relief package, the cost of living will be even further reduced for families.
“Today’s drop also tells us the hard conditions businesses have faced are easing, and that in turn will give businesses the confidence to invest, hire and grow once again.”
‘Gut feeling’ proved correct for predictions
Experts had a “gut feeling” the right decision would be for the Reserve Bank to cut the OCR at today’s meeting, 1News Business Correspondent Katie Bradford said this morning.
But she suggested a cautious option could involve signalling cuts while still holding firm.
“Much of it is about the language from the Reserve Bank.”
1News Business Correspondent Katie Bradford explains the factors behind the Reserve Bank’s big call. (Source: 1News)
On Monday, ASB chief economist Nick Tuffery said the OCR option with the fewest regrets has shifted in the past several months.
“We judge, though, that the Reserve Bank will have now also reached the point where it too assesses it needs to cut the OCR sooner than later,” he said in a report.
“We acknowledge it is a lineball call, with forecasters split on the outcome, but that is the decision the Reserve Bank is now likely to make.
“The biggest room for regret has quickly moved to holding interest rates too high for too long, with long-held concerns about easing too soon fading rapidly.
“We see the case for a cut this week as resting, to varying degrees, on the recent data, the extent of likely forecast changes, and tactics around taking the opportunity to start an orderly easing cycle that is well priced in by markets.”
The OCR is the wholesale rate at which banks can borrow money. With high inflation, the central bank has been aggressively raising the rate to cool down economic activity.
This means that savers see better returns as interest rates rise, but borrowers will be forking out more in repayments – like for mortgages. The general idea is when the OCR rises, it costs more to borrow money, encouraging people to save rather than spend.
It’s all people are talking about, but what is the OCR and how does it impact the lives of New Zealanders? (Source: 1News)
Tuffery continued: “The longer the RBNZ waits to cut the OCR, the more risk it finds itself having to cut by much larger amounts, which would also give ammunition to critics of how monetary policy has been conducted in recent years.”
The economist added that cut or no cut, the central bank likely “wants to temper markets’ overenthusiasm for pricing in cuts”.
“Even if the RBNZ cuts, it is unlikely to give a green light for the extent of cuts built in.
“The RBNZ is likely to signal a data-dependent pace as we step into NZ’s first easing cycle after all the Covid-triggered upheaval of our economy, household behaviour and priorities. How we all react, and how well inflation behaves, has yet to be revealed.”
