The Reserve Bank has cut the Official Cash Rate by 0.5% to 4.75%.
The Reserve Bank said it made its decision based on its belief that inflation is now within the 1-3% target range, and heading towards the 2% midpoint.
The big four banks – ASB, ANZ and BNZ and Westpac – quickly cut their variable rates by 50 basis points, following Kiwibank which went early and lopped 0.50% off its variable loan rates yesterday.
Watch on TVNZ+: What does the OCR drop mean for your back pocket? 1News Business Correspondent Katie Bradford and Q+A’s Jack Tame explain.
Finance Minister Nicola Willis reacted to the announcement, saying: “Lower interest rates will provide much-needed relief for households and businesses, allowing families to keep more of their hard-earned money and increasing the opportunities for businesses to invest and innovate.
“It’s early days and there is still more work to do, but our careful and deliberate plan to rebuild the economy is working. Like businesses, we are confident that brighter days are ahead.”
The Reserve Bank’s monetary committee explained its decision to cut the rate.
“Economic activity in New Zealand is subdued, in part due to restrictive monetary policy. Business investment and consumer spending have been weak, and employment conditions continue to soften. Low productivity growth is also constraining activity,” it said in a statement.
While some some exporters have benefited from what it said were improved export prices, global economic growth “remains below trend”.
It pointed out the world’s two biggest economies – the United States and China – are heading for slowing growth, while geopolitical tensions “remain a significant headwind” for the world economy.
The bank said the New Zealand economy now has “excess capacity”, encouraging prices and wages to “adjust to a low-inflation economy”.
The majority of economists had been predicting the 0.50% cut. With inflation now coming under control but the economy remaining in the doldrums, a series of cuts is intended to help boost economic growth.
Banks had already been trimming their fixed home loan rates following a 0.25% cut in the OCR in August, the first in four years.
Westpac this morning described the outlook for the economy as “chilly”, though with some signs of optimism for 2025.
And the most recent economic indicators show a similar picture – New Zealand’s economy contracted 0.2% in the June quarter and has been sitting either side of zero growth for most of the past two years. Inflation is, however, coming under control following a spike during the pandemic, though it was still sitting just above the target range at 3.3% in the 12 months to the June quarter.
Meanwhile, the unemployment rate in NZ was 4.6% in the most recent figures and 85,600 New Zealand citizens left the country in the year to May.
Kiwibank’s Elliot Smith said yesterday, when announcing it was cutting its variable rates to 7.75%, and 7.80%, that controlling inflation was “essential”, but prolonged high interest rates had “heavily burdened” households and businesses.
“Lowering rates quickly is crucial to provide much-needed relief for borrowers, so it is important Kiwibank, and the market, responds.”