Reserve Bank Cuts Official Cash Rate to 5.25% Amid Economic Concerns

• Reserve Bank cuts official cash rate to 5.25% following rising unemployment and weak economic growth.
• Economists had anticipated the cut due to a drop in inflation and slowing economic activity.
• Decision marks the first OCR cut in four years, following successive rises since late 2021.

The Reserve Bank has reduced the official cash rate (OCR) to 5.25%, marking the first decrease in four years. This decision comes after weeks of speculation, with many economists predicting a cut due to slowing economic growth and increasing unemployment.

The OCR had reached a peak of 5.5% in May last year, following a series of increases that began in late 2021 as the Reserve Bank attempted to control rising inflation. However, with the annual inflation rate dropping to 3.3% last month, pressure mounted on the Bank to ease the cash rate.

ASB chief economist Nick Tuffery noted that the Reserve Bank had likely reached a point where cutting the OCR was necessary, commenting, “We judge, though, that the Reserve Bank will have now also reached the point where it too assesses it needs to cut the OCR sooner than later.” Tuffery acknowledged that the decision was challenging, with economists divided, but highlighted that holding interest rates too high for too long posed a significant risk.

The Reserve Bank’s target range for inflation is between 1% and 3%. With inflation now within this range, the decision to lower the OCR appears to align with current economic conditions. The cut is expected to initiate an orderly easing cycle, which has already been priced in by the markets.

While a reduction in the OCR typically leads to lower borrowing costs, benefiting mortgage holders and businesses, it can also mean reduced returns for savers. The decision reflects a shift in the central bank’s strategy, moving from aggressive rate hikes to support the economy during a period of slowing growth.

The Reserve Bank’s decision also reflects concerns about the potential consequences of delaying the cut. Tuffery added, “The longer the RBNZ waits to cut the OCR, the more risk it finds itself having to cut by much larger amounts, which would also give ammunition to critics of how monetary policy has been conducted in recent years.”

This reduction in the OCR is seen as a pivotal moment for New Zealand’s economy, marking a transition from a period of tightening monetary policy to a more cautious approach aimed at sustaining economic growth while keeping inflation in check.