What the latest OCR drop means and what’s next

The Reserve Bank’s latest call on the Official Cash Rate has everyone talking, and after weeks of speculation, it made the bold decision to slash the rate by 50-basis points to 2.5%. The move underpinned the mounting pressures facing our economy and reflected the increasing lag to stimulate growth and spending across the country.

Infometrics Principal Economist Brad Olsen was expecting the mammoth cut, but says all economists weren’t united in that view.

“I think a big part of that was the fact that there's so many moving parts at the moment. There's our poor GDP data, but there’s also the balancing act the Reserve Bank has of keeping control of inflation, which continues to climb.”

Ultimately though, Olsen believes the right decision was made given the circumstances.

“If there is a crisis of confidence in the economy, which you can argue that there is, particularly amongst consumers, then a bigger jolt makes a huge amount of sense from the bank's point of view.”

While the OCR was nestled firmly in neutral territory before, the rate has now transitioned into stimulatory territory in the hope of encouraging spend and activity.

“The bit that makes us nervous though, is that monetary policy works with a lag. It's going to take a full 12 months for these interest rate cuts to be brought into the market and to start affecting everyone.”

Something that could become an issue with inflation out of its box at 3% right now.

“There's just this little bit of anxiety in me that you look at a year's time from now, you get to October 2026, you look at this, and you go, did we overstimulate?”

HOW LOW WILL RETAIL RATES GO?

With every OCR cut, mortgage holders naturally wait for the reduction in retail rates too.

“The average one-year rate is heading towards that 4.5% mark, but questions are being asked as to why that full cut hasn’t filtered through.”

“There's a suggestion that some of the cash back offers are why we’re not seeing the full margin pass through, but if you look at this recent cut, all of the banks moved their fixed interest rates before the OCR was cut in anticipation.”

Olsen says it’s possible we might see a one-year fixed rate edge closer to the 4% mark in the future, but not with the current state of things.

“There is a lot more strategising around choosing the right rate and term now than there might have been a year and a half ago.”

“We knew the rates were going to keep coming down then. But at some point, expectations from most of the major banks and from other forecasters are that the OCR will have to increase at some point within the next two years.”

WHAT CAN WE EXPECT IN NOVEMBER?

Even with all of that, Olsen expects the Reserve Bank to reduce the OCR by a further 25-basis points next month.

“There’s still a range of possibilities though. We would normally think that the Reserve Bank wouldn't end on a 50-basis point cut, that they should then have a 25-basis point cut and then a pause. That should be the usual sort of progression, but I don't think that's necessarily true, and if the Reserve Bank thinks it's done, then it’s done. So, all options are open.”

“But our central forecast at the moment is one more cut of 25-basis points in November.”

That will be the last cut for the year, until the Monetary Policy Committee meets again in February.

“By then, there should be enough evidence that the economy is turning around, spending is pulling up, that the job market is improving, so much so that the Reserve Bank can be confident that things are on a better path.”

WHAT’S GOING TO HAPPEN WITH HOUSE PRICES?

Olsen expects house prices to broadly move sideways over the next two years.

“There'll be some ups and some downs. You probably will see a bit more of an increase next year, simply because interest rates have come down. But more importantly, house prices have also come down for good parts this year.”

That’s largely in part due to the oversupply of listings on the market.

“You look at the likes of where rental yields are at the moment. Rents in Auckland and Wellington are falling, so you have to ask yourself the question about why people would dive back into the market if you’re going to make bad money as an investor.”

“On that basis, I'm not totally sure that you’ll see a huge lift in demand quickly.”

However, Olsen says with the current state of pricing, there are still plenty of opportunities out there to be had and bought.

“In my mind, you just have to be a lot more selective and a lot smarter about this than before. When everyone was doing it and making a lot of hay while the sun was shining, the sun's not shining quite like that anymore.”

WHY IS IT TAKING SO LONG FOR THE ECONOMY TO IMPROVE?

What started off as “survive to 25” became “survive in 25”, so what are you looking down the barrel of in 2026?

“We're saying to stay in the mix till 26, because things are taking some time to improve.”

Olsen says there are three elements that might explain the continued slowdown.

“One is very much housing market specific. There's still an enormous amount of properties available for sale and that suggests that people really are still under pressure. Secondly, there was a definite temporary shock from the tariffs announced earlier this year, which contributed to the huge hit to our GDP.”

“Thirdly, it's the lack of confidence from households and businesses.”

“They have more money because their mortgage costs are lower, but many are still opting to pay off their mortgage at a similar level, or they’re deciding to be more conservative or save more because they’re worried about their job.”

Ultimately though, Olsen says things are starting to finally turn around.

“I think we're seeing early signs of card spending turning around slowly but surely and a small but sustained shift in job ad numbers, it’s just taking longer than everyone expected.”