By Greg Smith*
The RBNZ cut the Official Cash Rate (OCR) to 2.5%n a few weeks ago, continuing a series of moves to ease monetary policy amid a very weak economy. The OCR is now at its lowest level in more than three years and is expected to fall further, with markets pricing in another reduction before year-end as the central bank desperately seeks to reboot economic growth.
Lower interest rates will ease pressure on many mortgage holders and free up disposable income to boost consumption. Reduced borrowing rates for businesses should stimulate investment and also hiring which will provide some support for a very weak jobs market. Exporters also benefit – lowering interest rates relative to the rest of the world typically weakens the New Zealand dollar, making our exports more competitive (but potentially lifting import prices slightly). Not all will benefit however – those that rely on interest income (including retirees) will be faced with lower returns for their savings.
What goes around comes around. This all follows one of the sharpest monetary tightening cycles in New Zealand’s modern history. From August 2021, the RBNZ lifted the OCR from 0.25% to a peak of 5.50% by mid-2024 in a bid to contain inflation and cool domestic demand. The effects were swift: mortgage rates soared, household spending softened, and business borrowing slowed.
Higher rates benefited savers, attracting a wave of money into 5%-plus term deposits and away from “riskier” assets. According to the RBNZ, total household term deposits jumped by around 60% to more than $160 billion between May 2022 and July 2025. But the tide is turning.
As rates have fallen over the past 14 months, so too have deposit returns. One-year term deposit rates have dropped from a peak of 6.09% in December 2023 to 3.78% in September 2025. Inflation, while lower than its highs, still sits around 2.7%, meaning many depositors are earning just 1% or so in real (inflation adjusted) terms. While borrowers welcome lower mortgage costs, savers are facing the opposite dilemma - diminishing returns on their cash.
With interest rates declining, investors are understandably reassessing their options. Assets that offer higher potential returns (including bonds and shares) are becoming increasingly attractive.
On the share market, investor interest has picked up notably. Dividend yields on the New Zealand stock market average over 3%, which is not far away from where many term deposit rates are now sitting. That’s before factoring in the potential for capital growth as rate cuts filter through to improving economic conditions.
Rate reductions are already helping support growth. The New Zealand economy contracted 0.9% in the June quarter, but the New Zealand Institute of Economic Research expects GDP to expand by about 1.5% in the year to March 2026, before picking up to 2.6% in 2027, driven by stronger business investment and steady export demand. Lower borrowing costs free up disposable income for households and improve cash flow for businesses, while around 40% of mortgage holders are expected to refix at lower rates in the next six months. In a country where housing wealth heavily influences confidence, easier policy can have a powerful multiplier effect, lifting consumption, investment, and employment.
As domestic rates fall relative to global peers, the New Zealand dollar tends to weaken (the kiwi recently fell to multi-year lows below 88 cents against the Australian dollar). A softer currency benefits exporters and boosts the NZ-dollar value of offshore earnings for NZ listed companies, while also enhancing returns for local investors holding global equities.
At the same time, lower discount rates lift the present value of future corporate earnings, often driving higher valuations for companies with rising growth prospects. It is worth highlighting that the stock market is very much forward looking, and typically prices in what lies ahead rather than behind. We have seen this to a certain extent already with rising investor appetite for listed property related stocks. Demand for many other interest rate sensitive sectors, such as construction, utilities, and infrastructure may continue to pick up.
Another strong alternative to term deposits are bonds which also appeal to investors seeking stability, income, and capital preservation rather than the higher risk and volatility of equities. In periods of falling interest rates, bond prices rise, offering both income and potential capital gains, while their priority in the capital structure offers extra protection if issuers face trouble. Equities, by contrast, carry more risk but offer greater long-term growth potential (in practice most investors benefit from holding a mix of both, using bonds for steadier returns and shares primarily for capital appreciation).
As with equities, investors can access bonds and other assets through managed funds. It is generally easier for most investors to buy bonds through a managed fund rather than directly. Direct purchases can require larger minimum investments and can be harder to sell before maturity. Managed funds allow small entry amounts, provide instant diversification across many issuers, and offer professional management. They also handle reinvestment and benefit from institutional pricing. While buying bonds and investing in term deposits directly gives fixed returns if held to maturity, managed bond funds are typically simpler, more flexible, and better suited to everyday investors.
While managed funds can fluctuate in value, they offer easier access to your money - investors can withdraw at any time typically without lock-in periods or withdrawal fees (in most cases you lose all or some of your interest if you break a term deposit early). As Portfolio Investment Entities (PIEs), they also enjoy a capped tax rate of 28%, compared with income tax rates of up to 39% on term-deposit interest.
Lower deposit rates are squeezing income for cautious investors, but actively managed funds (with the right manager) offer a flexible, diversified way to keep money working harder. It’s important to remember that not all managed funds are alike; their mix of equities, bonds, and cash varies widely, and investors should seek advice before switching from term deposits to ensure the chosen fund matches their goals and risk tolerance.
In summary, the broader picture is one of cyclical transition. After a long period of monetary restraint, liquidity is returning, and the balance of risks is shifting toward growth rather than inflation. Historically, such periods favour equities and diversified investment strategies. With interest rates falling and opportunities expanding, now may be the right time for many New Zealanders to re-evaluate how their savings are working, and whether or not it’s time to move beyond traditional term deposits.
Greg Smith is an investment specialist at Generate Investment Management Limited, Auckland. This article is intended for general information only and should not be considered financial advice. All investments carry risk, and past performance is not indicative of future results. To view Generate’s Financial Advice Provider Disclosure Statement or Product Disclosure Statement, visit www.generatewealth.co.nz/advertising-disclosures. The issuer is Generate Investment Management Ltd.
5 Comments
Actively managed funds: why would you, when 75%+ of them don't perform as well as much lower fee diversified index trackers.
The_Golem,
Perhaps an even bigger reason is that with their low costs, there is no room for the 'professional adviser' to make a commission on index funds.
No mention of precious metals...
A very vanilla article.
It's worth remembering that when interest rates fall, the price of existing bonds goes up because their fixed coupon payments are suddenly more attractive. This is what can give bond funds a boost.
But if you move from term deposits into bonds after rates have already dropped, you've likely missed the chance for that big price jump. At that point, the new bonds you can buy will offer returns much like the new term deposit rates.
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