So, another 0.25% Official Cash Rate (OCR) cut was the order of the day on 20 August.
There’s nothing unexpected in that. It was the last little nudge we needed to get us back to the Reserve Bank’s (RBNZ) previous estimated ‘neutral’ point of 3.00%—and most of the market was treating the verdict as a fait accompli.
The key takeaway from this week’s OCR announcement though? We’re not at the bottom yet.
In light of the ongoing weakness in the economy, the RBNZ has made significant changes to its interest rate forecast and is now eyeing further reductions in early 2026—possibly taking us down as low as 2.50%.
The fact that a bigger, 0.50% reduction was part of the consideration set for this announcement was also interesting to note. The only reason the RBNZ hasn't gone down that path this time round is simply because it wants to get its hands on a bit more data, and give previous rate cuts more time to flow through, before making any big calls.
There’s also the global picture to consider, of course. The US tariff situation is still a factor—but with Trump’s constant flip-flopping and backing out at the last minute (he’s just given China another 90 day extension) the markets are increasingly treating it as background noise.
Whatever final form the tariffs take, I can’t see the impact in terms of global inflation being as significant as previously anticipated.
But if there’s one thing that’s certain in this environment, it’s that we’re in for a whole lot more uncertainty.
What’s the outlook for the economy?
I think we’d all hoped the economy would be tracking a lot better than it is by now.
Things are improving, but some parts of the country are feeling the benefit of that much more than others.
Regional New Zealand is trucking along pretty nicely, thanks to a solid performance across agriculture and exports. Agriculture always does well in recessions. The rest of us haven’t quite felt the flow-on effect of that yet, as the sector focuses on paying back debt—but it will come in time.
Wellington is still very much feeling the impact of government cutbacks, which are hitting the private sector as well.
As we head into an election year, we could see National loosen the purse strings a little bit—injecting a bit more cash into the economy—to try and get the numbers looking a bit better.
We’re on the right trajectory; it’s just taking longer than expected to get there.
What does this week’s OCR news mean for interest rates?
With all the preemptive rate cuts we’ve had from the banks in the lead-up to the announcement, this latest reduction is already largely priced in.
Given the RBNZ’s new forward trajectory, though, we’re expecting to see short-term swap rates track downwards over the next week or so—if not sooner. That will create space for six and 12-month fixed term rates to drop as well.
The best advertised one-year rate on offer at the moment is 4.79% and the best advertised two-year rate is 4.89%. Hopefully we see further reductions shortly, but it will be a bit of a balancing act for the banks.
The advice to borrowers at the moment is to split your mortgage across a mix of shorter- and longer-terms, allowing you to tap into some interest rate certainty, while also having the chance to benefit from future rate cuts.
Many borrowers are playing the short-term game, with over 50% of mortgages due to be refixed within the next six to 12 months. So happy days all round.
Feel free to reach out for a chat if you’d like some guidance on what’s going to work best for you and your situation.