Reserve Bank Lowers OCR to 3% – What You Need to Know

The Reserve Bank has cut the Official Cash Rate (OCR) by 0.25%, bringing it down to 3%. While this was widely expected, the split decision showed there are still divisions inside the bank about how much support the economy really needs. Two members pushed for a larger 0.50% cut, which signals growing concern about the pace of the recovery.

The central bank also revised its outlook. It now expects the OCR to fall further, to 2.5% by the end of the year. That suggests two more cuts are likely before 2025 is out.

What this means for mortgages
Financial markets reacted quickly, with two-year swap rates dropping from 3.1% to 2.94%. If rates keep trending down, homeowners and businesses with debt should see lower borrowing costs over the coming months.

Kiwibank’s chief economist, Jarrod Kerr, said this should push two-year fixed mortgage rates closer to 2.8%. He added that while the cut is welcome, many borrowers have already locked in at higher levels, so the benefit has been slow to flow through. With half of all mortgages due to roll over in the next six months however, borrowers might consider splitting their loans — keeping part short-term to take advantage of lower rates now, and part longer-term for stability. We’ve got a great article on our blog about how long to fix for.

Businesses still cautious
The Reserve Bank noted that lending to businesses remains weak despite credit being available. Rising unemployment and spare capacity in the economy are weighing on confidence.

Adrienne Begbie of Prospa explained that lower interest rates can be as much about mindset as money. With many small business owners relying on personal funds or home equity, cheaper mortgages and lower borrowing costs can free up cash – often making the difference between just getting by and investing in new staff or stock.

The bigger picture
The economy still faces challenges. GDP is expected to shrink by 0.3% this quarter, and unemployment is tipped to rise to 5.3% later this year. Inflation remains near the top of the RBNZ’s 1–3% target range but is expected to ease back toward 2% in 2026.

Markets now see a high chance the OCR will hit 2.5% before year-end. At today’s 3%, monetary policy is still not considered highly stimulatory, which is why more cuts are likely on the way.