By Shamubeel Eaqub, Chief Economist, Simplicity Research Hub


The RBNZ has today cut the OCR – the policy interest rate – by 0.5% basis points to 4.25%. Further reductions are necessary to build the floor under an economy that's currently in the deepest and longest recession in living memory.

Setting the scene

Inflation surged during and after the pandemic. It was a rolling maul of shocks. Initially, pandemic effects (illnesses) and policies (movement restrictions) led to supply bottlenecks. Massive stimulus – both through very low interest rates and more government spending – restored demand, but supply was still hampered by pandemic dislocations. This drove up prices globally. The Russian invasion of Ukraine caused a sharp but short lived shock in some key commodities (oil and grains), which also boosted inflation.

Central banks around the world increased interest rates to reduce inflation. Most are now cutting interest rates to reflate economies, now that the inflation shock has eased (although inflation is still relatively high compared to how weak the economy is).

Future outlook for Kiwi interest rates

The outlook for interest rates in New Zealand is further rate cuts. The RBNZ projects a low of 3% vs the 4.25% they've announced now. They will need to cut interest rates further to put a floor under this recession, which is already deeper and longer than the Global Financial Crisis (GFC).

Slowing net migration (which means slowing population growth) and fiscal austerity will drag on the economy. If the RBNZ don’t cut interest rates at a steady pace, there will be unnecessary job losses and further business closures.

The cut today was fairly universally expected. The projections from the RBNZ of a rapid return to economic growth are too optimistic, in my view. Faced with a reality that is less rosy than their forecasts, they will likely cut interest rates in the new year.

This will help, as those refixing their mortgages will get interest rate relief. And gradually, as interest rates fall and the recession is halted, postponed investments and borrowing will kick back in, driving the climb out of the recession.

Impact of today's decision on everyday Kiwis

So, what does it mean for Kiwis? The RBNZ is finally moving towards supporting this economy. But it has more work to do until this recession is averted and a recovery installed. Until then, there will be a few more months of pressure on households and businesses. But there is every reason to feel optimistic beyond mid-2025, under a concerted campaign of interest rate cuts which translate returning hope for a recovery, into a real one.

Figure 1 & 2: Convergence on inflation & policy 

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