The Reserve Bank of New Zealand (RBNZ) has cut the Official Cash Rate (OCR) by 25 basis points to 3.25%, marking the sixth consecutive reduction since August 2024. Acting Governor Christian Hawkesby, presiding over his first full Monetary Policy Statement, delivered the widely anticipated cut as the central bank continues to navigate the delicate balance between supporting domestic economic recovery and managing global economic headwinds.

The OCR Journey: From Peak to Present

The past three years have been a rollercoaster for Kiwi borrowers and savers. After holding the OCR at an emergency low of 0.25% during the COVID-19 pandemic, the Reserve Bank embarked on an aggressive tightening cycle between October 2021 and May 2023, pushing rates to a 15-year high of 5.50%.

This dramatic shift was driven by inflation that soared to 7.3% in mid-2022, well above the RBNZ's 1-3% target band. The impact on mortgage holders was severe – average one-year fixed rates climbed from 2.58% in August 2021 to a painful 7.50% by January 2024.

Since August 2024, however, the tide has turned. With inflation now sitting comfortably at 2.2% – right in the middle of the target band – the RBNZ has progressively cut rates by 225 basis points, bringing welcome relief to stretched households and businesses.

Market Expectations and Future Trajectory

Before today's announcement, market consensus firmly expected the 25 basis point cut, with financial markets having already priced in the move. The real intrigue lies in what comes next.

The major banks have divergent views on where the OCR will bottom out:

• ANZ expects the OCR to reach 2.50% by September 2025
• ASB has revised its forecast lower, projecting 2.75% by mid-August
• BNZ maintains a 2.75% year-end target
• Kiwibank, the most dovish, calls for aggressive cuts to 2.50% by year-end

The RBNZ's own projections suggest a "neutral" OCR of around 3.00%, though Acting Governor Hawkesby emphasised there's "no pre-programmed path" for future moves. Notably, today's decision wasn't unanimous, with some committee members favouring a pause – a sign of the uncertainty clouding the outlook.

Banks React: Floating Rates Fall, But Fixed Rates Face Constraints

The major banks moved swiftly following the announcement:

• ASB reduced its housing variable rate by 25 basis points to 6.64%
• Westpac cut its Choices floating rate by 25 basis points to 6.74%
• Kiwibank lowered its variable rate by 25 basis points to 6.50%
• BNZ announced similar cuts to floating rates

However, the passthrough to fixed rates tells a more complex story. While floating rates track the OCR closely, fixed rates are influenced by wholesale funding costs and international rates. Most major banks now offer 1-2 year fixed rates slightly below 4.99%, having already priced in expected OCR cuts.

Market experts note that longer-term fixed rates are unlikely to fall much further, as they're already well below 20-year averages. The 2-year swap rate sits around 3.15%, limiting banks' ability to cut fixed rates without compressing margins. Additionally, banks must maintain profitability while managing credit risk in an uncertain economic environment.

What This Means for Borrowers and Savers

For Mortgage Holders: The cumulative 225 basis point reduction since August provides substantial relief. For a $500,000 mortgage over 25 years, the total OCR cuts translate to approximately $300 less in fortnightly repayments. With 55% of mortgages either floating or due for renewal in the next six months, many households will feel the benefit quickly.

Those on floating rates see immediate relief, while fixed-rate borrowers approaching renewal can lock in rates around 2.5 percentage points lower than the peak. The sweet spot appears to be 1-2 year terms at 4.99%, offering flexibility for potential further cuts while securing current savings.

For Savers: The flip side is reduced returns on term deposits and savings accounts. Banks have cut deposit rates in lockstep with lending rates, making it crucial for savers to shop around and consider longer terms if they believe rates have further to fall.

The Road Ahead

Today's OCR cut occurs against a backdrop of significant global uncertainty. US trade policies and tariff threats loom large, with Treasury estimating they could reduce our trading partners' growth from 2.5% to 2.0%. The RBNZ acknowledged these risks, stating it has "scope to lower the OCR further as appropriate" as the situation clarifies.

Domestically, green shoots are emerging. The manufacturing sector shows expansion after two years of contraction, dairy and meat exports remain strong, and mortgage relief is beginning to flow through to consumption. However, the services sector remains in mild contraction, and retailers continue to struggle.

The next OCR decision on 9 July will be crucial. If global risks materialise or domestic recovery falters, expect the RBNZ to accelerate cuts towards 2.75% or even 2.50%. Conversely, if recovery gains momentum and international tensions ease, the central bank may pause at 3.00%.

For now, Kiwi borrowers can breathe a little easier, while remaining alert to the shifting sands of global economics. The OCR may be down, but uncertainty is up – making the Reserve Bank's job of steering the economy more challenging than ever.

Further Reading:

• RBNZ Monetary Policy Statement May 2025