The Reserve Bank’s latest Official Cash Rate (OCR) decision was a deliberate message to households that it would not tolerate any more spare capacity in the economy, even at the risk of letting inflation break above 3%.
Businesses weighing investments or households considering purchases can be confident the central bank will step in to support the economy and stamp out any signs of weakness.
It is a Kiwi version of the Greenspan Put. The 1990s idea that the US Federal Reserve would step in to rescue markets whenever they fell, giving investors confidence they wouldn’t face major losses.
The Reserve Bank’s Monetary Policy Committee explicitly aimed to grab attention with a 50 basis point rate cut on Wednesday, despite believing the economy hadn’t deteriorated much since August.
It assessed economic activity through the middle of 2025 had been weak, as expected, but partly due to supply constraints and uncertainty, rather than a lack of actual demand.
Expensive energy, high milk prices, and unfavourable weather hit production and manufacturing. But household consumption was recovering and elevated commodity prices were supporting growth in the primary sector.
“Consequently, the Committee has revised its assessment of current spare capacity only marginally in response to new GDP and activity data, but note that the new data imply some downside risk,” the Reserve Bank said.
“More timely indicators suggest that economic activity recovered modestly in the September quarter, but there remains significant spare capacity in the New Zealand economy.”
That assessment of the economy might cause you to think the policymakers had opted for a small rate cut, or even a pause — considering inflation is at the top of the target band.
But you’d be wrong. The committee cut interest rates 50 basis points to 2.50% and said they were willing to do so again if needed.
“Some members continue to put relatively more weight on the risk that excess precaution by households and businesses and, therefore, subdued economic activity and employment persists. A larger reduction in the OCR could mitigate this risk by providing a clear signal that supports consumption and investment.”
“The Committee remains open to further reductions in the OCR as required for inflation to settle sustainably near the 2 percent target mid-point in the medium term,” the Reserve Bank said.
Translation: The Reserve Bank will sort out any economic underperformance, so get busy spending.
Playing with fire
Dave McLeish, a veteran bond investor and managing director of Wedge, said there was little historical precedent for the Reserve Bank to cut rates 50 basis points while inflation was at 3%.
The only examples are during the Global Financial Crisis and immediately after the Christchurch Earthquakes when inflation was artificially high due to a GST increase.
“This decision was much more economy-focused than inflation-focused,” he said, noting it was hard to square with the Bank’s inflation mandate.
The Reserve Bank was relying on uncertain and unreliable forecasts of low inflation to justify aggressive rate cuts today, without making a strong argument that the economy had weakened much.
“A cut of this size might ease the pain today but deepen the problem tomorrow. Rate cuts of this size and warm inflation don’t mix in my opinion,” McLeish said.
Government ministers Nicola Willis and David Seymour, who advocated for the Reserve Bank to focus only on price stability, were unbothered by the Reserve Bank’s decision to ignore inflation and welcomed the rate cuts.
Seymour said he was “happy” with inflation at 3% and Willis said it was okay for the central bank to “tolerate a fluctuation” above target as long as it didn’t last three years.
“Were there to be a very short term fluctuation in inflation above 3% they think there's enough capacity in the economy that it would come back down,” Willis told reporters.
Kelly Eckhold, Westpac NZ’s chief economist, said the Reserve Bank was completely unconcerned about inflation and saw the greater risk as too much spare capacity in the economy.
While the Bank’s record of meeting downplayed recent weak data, he said it was clear policymakers had taken a negative signal from it and were not willing to ignore it.
The Reserve Bank’s August Monetary Policy Statement noted there was already plenty of excess capacity and that the Bank would act to prevent it from widening.
Two committee members voted for a 50-basis-point cut at that meeting and likely convinced the other four they’d been right the first time, Eckhold said.
Easing cycle continues
Economists at Kiwibank said they now saw potential for the OCR to be cut to 2% in February and were forecasting a move to 2.25% in November.
“We don’t think the easing cycle is over yet. And the Reserve Bank is far from signalling the end. In fact, with just one word the Reserve Bank has kept the door open to a cash rate below 2.5%.”
“The key word here is “reductions”. Forgive us for getting grammatical, but that little ‘s’ at the end makes all the difference. In market-speak, the Reserve Bank has given themselves optionality.”
Market traders reacted to an extension of the easing cycle. Bond yields were bid lower, the kiwi dollar fell against trading partners, and the local stock market rallied.
But inflation risks haven’t disappeared. The Reserve Bank estimates core inflation was at 2.8% in the June quarter and headline inflation at 2.7%, with the latter expected to reach 3% in September.
Slow economic growth may not automatically cool inflation. Committee members said it partly reflected supply constraints rather than weak demand, with potential output held back by minimal labour force growth and weak investment.
“This limits the rate of growth the economy can sustain without generating additional inflationary pressure. In an environment of constrained supply, inflation could stay elevated for longer as demand recovers,” they said.
ANZ chief economist Sharon Zollner said the Committee was keeping an open mind on further rate cuts, noting that Wednesday’s move effectively front-loaded what had already been signalled in August.
“Turning points are very messy, and this is not the time of the cycle to be hubristic about one’s ability to forecast precisely what’s needed or what will be delivered, particularly given the long lags with which monetary policy decisions work their way through the economy”.
“If the data starts to pick up meaningfully, they won’t cut,” Zollner said.
16 Comments
The committee cut interest rates 50 basis points to 2.50% and said they were willing to do so again if needed.
With headline inflation at almost 3%, this proves what a load of bollocks their inflation mandate is.
I don't see the finance minister making sure they're enforcing it.
It’s a stupid mandate. Kill the economy so inflation is 2.9% not 3.1%. Before that they held interest rates at stupidly low levels while house prices went to the moon in an attempt to get inflation up from 1% to 2%. I think they are sensible to ignore the finer details of their stupid mandate.
It's a gift to the banks and to asset holders, at everyone else's expense. MPC confident the inflationary risk is low enough for them and their rich mates to resume screwing over the rest of us. (and if they're wrong, oops! Mistakes happen!)
Very much so.
Saving asset values will eventually stimulate demand. However, inflation is going to destroy wages so unless you are an asset owner you are going to get rogered.
We created the inflation problem by overeasing to 0% then the RBNZ engineered the recession by over hiking to 5.50% - something they explicitly said they would do ( so theoretically they achieved their mandate) now it looks like we will rinse and repeat to the downside. Great for trading volatility I guess ! Not so good for our cycles. One of the biggest problems is we have this situation where banks offer better fixed rates as a way to lock customers in. First thing the new Governor needs to do is sit the banks down and change the structure to floating as a cheaper option. It will be better for everyone ultimately. Less over shoots
I have always wondered how the big four fund so much floating in Aussie vs here, they operate out of the same trading floors in London NY etc. Via there out sourced funding ops etc.
I would consider a 5 year rate better then a floating as an investor... gives you security
When you fund offshore you do a cross currency swap into floating AUD 90 day + the margin it swaps back to then you hedge appropriately in the interest rate swaps market to the duration that’s required. identical to how NZ does it so there’s no difference whatsoever.
And while she's at it, give them a rev up over implementing open banking.
If it was possible to give 4.5% floating, wouldn't one of the smaller banks have done it to win customers? Kiwibank for example?
Floating goes off the rolling average 90 day bank bill rate so it takes a while to come down but there’s no other reason why it’s not as competitive as the fixed rates. Every bit of funding that banks raise arrive in the balance sheet as a 90 day rate + the margin it’s swapped back to in whatever form. It’s then re-swapped into the duration that’s required.
They have just created a culture in which we tend to fix as ( I think) we instituted an easier system with which to switch banks than Aussie has so the local banks counter this with offering lower fixed rates
The RBNZ will step in to save the economy?
How pray tell when they have zero control outside these shores (and very limited control within)?
I don't see where the "little risk of inflation" is coming from, producer costs are up over 4 percent this year and over 3 the year before. It's only weak demand that is checking inflation, at the expense of producer margins. If you stimulate demand now the risk is producers are going to respond by raising prices to recover their margin, not by expanding their production at unprofitable prices.
Crude monetary stimulus and fiscal consolidation is not the way out of this mess, it's more likely to be the route to entrenched stagflation.
A larger reduction in the OCR could mitigate this risk by providing a clear signal that supports consumption and investment.
There you have it2, they just want us to go and consume more and more, spend more and more, and woe betide any resulting inflation. It is beginning to look as if they will over cook the downslide of the OCR again until it is too late, and require another Orr-esque knee jerk set of hikes down the road.
The discretionary income gained from lower mortgage spending will still be eaten up by higher fixed costs - Food, rates, insurance etc, and I'm of the opinion people aren't keen to go spend up large vs continue paying down their debts given the shock they have had for the last 4 years. Then again human behaviour takes time to change so this may be a slow start to recovery of some shape.
Well, there you have it. I remember discussing at length the future path of the OCR with Kraken, his view was that it won't go much lower because of inflation risk, mine was that it will go much lower because of the weak economy. And indeed, unsurprisingly to me, when push comes to shove, the RB will support the economy at the expense of inflation.
I have stated previously, that in my opinion, central banks will ratchet upwards their "inflation target band". It hasn't happened yet, but I would wouldn't bet against it.
To be clear, I think it was a mistake to cut by 0.5%, the RB is overshooting yet again, but I think it's more important to consider what WILL to happen, rather than what I or others think SHOULD happen.
We agree (wow). Orrs technique of wild understeer to wild overseer.
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