Our Insights on the Impact of OCR Cuts
October has been a big month for financial news in New Zealand. Earlier this month, the Reserve Bank made a significant decision by cutting the Official Cash Rate (OCR) by 50 basis points, reducing it to 4.75%. This is the second reduction in four years, following a 25 basis point cut in August.
Adding to the positive outlook, Stats NZ has revealed that the annual inflation rate for the September quarter has dropped to 2.2%, entering the Reserve Bank’s target range of 1-3% for the first time since March 2021.
In our latest blog post, we delve into the potential implications of these changes for businesses, individuals, and homeowners as we approach the end of 2024.
Following the Reserve Bank’s announcement, New Zealand banks acted quickly, reducing both their floating and fixed interest rates. Economists are predicting that the OCR could drop to below 3% within the next one to two years, and we anticipate several more cuts in the near future.
These reductions in the OCR are expected to alleviate the interest burden on households and businesses, ensuring that much needed cash will circulate back into the monetary system. This influx of cash is hoped to stimulate spending in the retail and hospitality sectors, ultimately putting more money back into the pockets of consumers and businesses.
Because most borrowers are on short-term fixed or floating interest rates, the majority of homeowners stand to benefit from the falling interest rates as the OCR continues its downward trajectory. Property Economist Kelvin Davidson noted that 68% of new loans in August were set for terms of six months or less. This aligns with our recommendation to our clients, to opt for shorter fixed periods, such as six months, allowing them to follow the market down and capitalise on further interest rate reductions.
As we approach the final months of 2024, there are several encouraging signs that should boost confidence among both businesses and consumers. ANZ’s New Zealand Business Outlook, published at the end of August, showed a notable increase in business confidence, which surged even further in September, reaching its highest level in a decade.
In addition, Stats NZ announced a drop in the annual inflation rate – another positive indicator. It suggests that the most challenging phase of this economic cycle may be behind us, and the outlook for the second half of 2025 appears much more optimistic.
We look forward to the next OCR review, scheduled for 27 November. Following this, the next review will not take place for another three months.
Buying a home is a significant life step, and the drops in the OCR could make this dream more achievable for many Kiwis. Understanding the impact of these economic changes on your financial situation is crucial. If you would like to discuss interest rate strategies or seek financial advice, please do not hesitate to reach out to our team.