The 50-basis-point cut brings the OCR to its lowest level since November 2022.
It follows a 50-point cut to 4.75 percent in October.
“Annual consumer price inflation has declined and is now close to the midpoint of the Monetary Policy Committee’s 1 to 3 percent target band. Inflation expectations are also close to target and core inflation is converging to the midpoint,” the Monetary Policy Committee (MPC) said in a statement.
It said the speed and size of future rate cuts would be determined by economic data.
An indicative forecast in the monetary statement suggested a slower rate of cuts next year with the cash rate falling to around 3.5 percent by the end of next year.
Economists had overwhelmingly forecast the big cut as the economy remained weak, households and businesses kept tight control on spending and investment, and the unemployment rate kept rising.
The RBNZ acknowledged the weak state of the economy, but said there were signs an improvement was coming now that inflation was back in its 1-3 percent target band.
“Economic growth is expected to recover during 2025, as lower interest rates encourage investment and other spending.”
The MPC said external risks from geopolitical tensions and political uncertainty could stoke economic and inflation volatility in the medium term.
Retail banks were quick to reduce floating mortgage and business loans and savings rates, with the Co-operative Bank, Kiwibank, ANZ, BNZ, Westpac, TSB, and ASB passing on the full extent of the cut to most of the loans.
Further cuts coming
Kiwibank chief economist Jarrod Kerr said the RBNZ had no other choice but to cut by 50 bps.
“Anything other than a 50bp would have been a shock, and hard to explain.”
But he expressed concerns the RBNZ might not move fast enough with further cuts, which he said the economy badly needed.
“We believe rates needs to be cut lower, than the RBNZ’s 2025 forecast track, to stimulate an economy struggling to get out of recession.”
“They’re implying a 25bp cut in February. We’re strongly advocating for another 50bp, to get the cash rate below 4 percent. But the RBNZ is signalling 25. It’s too soon to be scaling back cuts at such restrictive levels,” Kerr said, adding there was a risk the RBNZ would make a mistake as it had done earlier in the year by sending the wrong signals.
Chief property economist at research firm CoreLogic Kelvin Davidson said the rate cut with the prospect of more to come would further lift property market sentiment.
“All in all, this is good news for those mortgage borrowers who have stayed floating or fixed short in anticipation of further interest rate drops.
“The clear guidance about further OCR cuts might also bring back some confidence to existing owner occupiers looking to relocate, alongside the already decent activity from first home buyers and early return of investors.”
Finance Minister cheers ‘good news’
Finance Minister Nicola Willis said the rate cut was “good news for families and businesses – both directly and indirectly”.
“The drop means many everyday Kiwis can focus more on what matters most to them, and less on making the next mortgage repayment or whether their card will decline at the supermarket.”
She said there was still much to happen and government policies would remain focused.
“The steps the government has taken to carefully prioritise government spending, invest in frontline services, reduce red tape, and restore confidence in the economy are having an impact. We are headed in the right direction.”
