Reserve Bank cuts Official Cash Rate to 4.75%

• RBNZ cuts official cash rate by 50 basis points to 4.75% - lowest since February 2023
• Slowing inflation and subdued economy justify bigger cut
• Economists and financial markets overwhelmingly backed 50 basis point cut
• RBNZ says the size and speed of future cuts will be determined by state of the economy
• Retail banks already cut some rates in anticipation

The Reserve Bank has cut its benchmark cash rate by 50 basis points.

The central bank cut the official cash rate (OCR) to 4.75 percent, as expected, to its lowest level in 18 months, saying the bigger than usual rate cut was justified by slowing inflation and the slack in the economy.

"The Committee agreed that it is appropriate to cut the OCR by 50 basis points to achieve and maintain low and stable inflation, while seeking to avoid unnecessary instability in output, employment, interest rates, and the exchange rate," the Monetary Policy Committee (MPC) said in a statement.

It said the speed and size of future rate cuts would be determined by economic data.

Retail banks have been quick to cut lending rates in anticipation of the big sized cut.

Within minutes of the Reserve Bank's announcement that it would cut the official cash rate, banks had revealed they were lowering home loan interest rates.

ASB said it would cut its variable home loan rate from 8.39 percent to 7.89 percent.

Its Orbit rate would drop to 7.99 percent.

Executive general manager, personal banking, Adam Boyd said 120,000 customers would be affected.

"We do expect this downward OCR trend to continue into 2025 which will provide further relief."

ASB was also cutting savings rates - its on-call interest rate would drop from 2.65 percent to 2.15 percent. The Headstart youth account rate would drop from 4.75 percent to 4.15 percent.

Earlier in the day, ASB announced cuts of 10 basis points across a number of fixed terms, and a 16bop reduction for the one-year rate.

BNZ said it, too, would pass on the full OCR cut to variable home loans.

General manager, home lending products James Leydon said the OCR cut would be welcome news for many households.

"We are continually assessing our interest rates and looking for opportunities to pass on rate reductions to our customers. Customers will benefit from our latest variable rate change which is effective from tomorrow," Leydon said.

"BNZ will continue to move quickly in response to changes in external factors, including the Official Cash Rate and wholesale interest rates, to ensure we're passing rate changes on to our customers as quickly as possible."

Westpac said it would cut its floating rates by 50 basis points and would cut fixed terms by 10.

General manager of product Sarah Hearn said it was also reducing its test rate - the rate at which it checks that borrowers can afford lending - to 8.15 percent.

"We're pleased to be delivering another rate cut for our home loan customers, and confidence boost we expect this will provide to households and small businesses. Westpac's economists estimate that nearly half of all homeowners on fixed rates will have rolled onto lower rates by the end of the year.

"At the same time, we know many households are still facing cost pressures, while our savings customers will be watching falling interest rates closely.

"We continue to proactively contact home loan customers who may be facing into financial difficulty, and we encourage anyone who's concerned about their financial situation to get in touch."

Kiwibank said on Tuesday it was reducing its variable rate by 50bps.

The chief economist at property research firm Corelogic, Kelvin Davidson, said the RBNZ statement had a sense of urgency.

"There's a sense in the Reserve Bank's commentary that they feel a need to act fairly quickly to get monetary policy back towards a more neutral setting (or even stimulatory), rather than the restrictive territory it's been in for quite some time now."

He said he expected mortgage rates to keep falling, which would likely lift confidence in the housing market and help stop the fall in prices.

ASB chief economist Nick Tuffley tentatively expected a further 50 basis point cut in the last meeting of the year in November.

"The outlook appears very data dependent, with a further 50bp not a done deal. The weakness of data through into early next year will influence how long the RBNZ keeps cutting in 50bp moves."

'Relief' on way for households, businesses - Willis

Finance Minister Nicola Willis says the OCR cut is welcome news for families and businesses.

"Lower interest rates will provide much-needed relief for households and businesses, allowing families to keep more of their hard-earned money and increasing the opportunities for businesses to invest and innovate."

Willis said New Zealanders have been doing it tough over the last few years "with the economy in recession, high interest rates and sharply rising prices.

"That is changing as inflation falls towards the target level, interest rates come down and businesses have the confidence to invest and hire again."

For homeowners, Willis said a lot of people would be able to switch to a lower interest rate, meaning that would "free up more cash for many".

Willis pointed to ANZ's Business Outlook which showed that businesses were feeling more positive.

"The Mood of the Boardroom echoed this, showing that confidence in the economy has reached its highest level since 2016."

Willis said there was still more work to do but the government's "careful and deliberate plan" to rebuild the economy "is working."

"We are confident that brighter days are ahead," Willis added.

On unemployment figures, Willis said her government inherited an "economy in trouble."

"We said that we would put a lid on inflation so that interest rates could drop and growth could revive," adding the government was making good progress on that goal.

"We are seeing green shoots."