Vineeta Rao
Auckland, February 20, 2025
The Monetary Policy Committee of the Reserve Bank of New Zealand (RBNZ) Governor has reduced the Official Cash Rate (OCR) by 50 percentage points, bringing the OCR down to 3.75%.
The Committee said that the economic outlook remains consistent with inflation remaining in the band over the medium term, giving it the confidence to continue lowering the OCR.
The latest reduction brings the OCR down by 175 points since August last year. This was the third consecutive cut, although the Bank has signalled that future cuts may be more conservative, bringing the final figure for the year to the 3% mark.
“The Monetary Policy Committee agreed that a 50 basis point reduction would be consistent with its mandate of maintaining low and stable inflation, “while seeking to avoid unnecessary instability in output, employment, interest and exchange rates. If economic conditions continue to evolve as projected, there could be scope to lower the OCR further through 2025.”
OCR: A background
The OCR set by RBNZ is the key interest rate that impacts the cost of borrowing and saving money in the country and is used to maintain price stability. Simply put, it is the interest that banks earn on the money they hold with the RBNZ as well as the interest they pay for borrowings from the Bank. Hence, any cuts to the OCR have a bearing on the money that the banks make or pay, which banks often choose to pass on to customers. People seeking and repaying mortgage loans are also affected by OCR changes.
Typically, a lower OCR has a domino effect and banks also lower their interest rates on loans, including mortgages. Following the RBNZ announcement, several banks have announced a downward revision of their lending rates.
Banks respond
ASB reduced variable and business loan rates by 0.5%. It also lowered savings and on-call rates by 0.5%, and variable home loan rate to 6.9%. KiwiBank dropped its variable home loan rate from 7.25% to 6.75% (effective February 24, 2025) for new lending and for existing loans from March 10. The Cooperative Bank announced that while it would pass through the full 0.50% saving on to floating home loan rate borrowers, savers would not get the full 0.5% benefit.
ANZ dropped its floating home loan rate by 50 basis points (bps) to 6.89% and its flexible loan rate to 7%, the lowest in 29 months.
While acknowledging the weakened state of the economy, rising unemployment and restricted household and business spending, the RBNZ pointed out that there were signs of improvement, given that inflation was within its target band.
“Economic growth is expected to recover during 2025. Lower interest rates will encourage spending, although elevated global economic uncertainty is expected to weigh on business investment decisions,” the Central Bank said.
Government happy
Prime Minister Christopher Luxon was pleased with the announcement and claimed that inflation was under control and that the country was back on the path to economic recovery. “We are focused on driving inflation down further to ease the cost-of-living pressure that you are facing. It is still really tough, with many families and businesses still feeling the squeeze, and we know that there is more to do. But we are committed to ensuring that we are doing the best we can for New Zealanders,” he said.
Finance minister Nichola Willis said that while the OCR cut was expected, it was good news for families with mortgages who had been facing a “protracted cost of living crisis.”
Opposition critical
Labour Party Leader Chris Hipkins was guarded in his comments, saying that there was a lot more to do. “This OCR Cut will make a big difference.”
His Finance Spokesperson Barbara Edmonds said. “The reduction in OCR is a direct response to the economic downturn caused by the Luxon government’s decisions. The economy is weak thanks to the government’s cancellation of infrastructure projects, leaving 13,000 construction workers out of a job.”
Green Party Co-Leader Chlöe Swarbrick said, “While today’s OCR announcement is good news for everyone with a mortgage, it is critical to understand the unnecessary collateral damage created by the government’s chosen path of destruction. Those wounds will not heal quickly or by themselves.”
Referring to the government’s public sector restructuring which saw job cuts, she said, “The collateral damage of the decisions of Christopher Luxon and Nicola Willis means more inequality, more homelessness, more climate-changing emissions, more inequality and more long-term issues. Maybe that is what they mean by ‘going for growth’?”
Vineeta Rao is an Indian Newslink Reporter based in Auckland.
