OCR cut numbs financial pain in cash-strapped economy

The Reserve Bank has lowered the official cash rate (OCR), but finance professionals warn it will make little difference for people who are struggling.

On Wednesday, the OCR dropped by half a per cent to 3.75 per cent, the lowest rate in two years.

Reserve Bank Governor Adrian Orr says the three consecutive drops reflect growing confidence in the economy.

"Economic growth is picking up. We know people have been doing it tough, but times are going to be getting better."

While the Reserve Bank's move is expected to eventually lower mortgage repayment costs, 80 per cent of Pacific families live in rentals.

Family Finances Services Trust budget advisor Heather Lange told RNZ that these adjustments don’t translate to real relief for families.

"There doesn't seem to ever be any relief in rent when we get these mortgage rate cuts.

"For the mortgage holders, most people are fixed for a period of time, so while this might change the advertised rate, it's not going to change what happens to somebody's repayments until they unfix somewhere down the track."

Orr cautions that while inflation is down, prices remain high.

"When you are going into the shop, you're not going to get a discount because inflation is now 2 per cent, you're just not going to have to pay significantly more in a year's time."

Infometrics chief forecaster Gareth Keirnan says banks were quick to react by lowering rates but warns this might not translate into easier access to the property market.

"We have already seen a slight upturn in the property market and more buyers coming back in. Later this year, you may start to see prices pushing back up."

Taking initiative

While the cut was widely expected, Keirnan says many economists want the Reserve Bank to “front foot” inflationary concerns.

"Sometimes you feel like they're reacting to current data a bit more than trying to look forward and see what is coming around the corner.

"They were slow to raise interest rates when inflation was getting out of hand in 2021, and in 2024, they were still talking about keeping rates high when the economy was in recession."

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But Westpac senior economist Satish Ranchhod says the Reserve Bank has done a "fairly good job" over the past few years.

"A lot of the inflation pressures we've been dealing with, they were a legacy of the COVID period ... the environment in terms of economic conditions, and especially globally, has surprised us all.

"We were pretty active in getting in front of the inflation pressures that we saw emerging with rate cuts coming pretty fast, and now that inflation's come down, they're moving quickly to get the economy back on an even keel."

Ranchhod predicts another quarter per cent cut in April and May.

"Even though the economy is still pretty soft and inflation is back at target, I think the Reserve Bank's conscious that there are still some risks out there, especially with the drop in the New Zealand dollar that could push inflation back higher again."

Speaking to William Terite on Pacific Mornings, Keirnan acknowledged that while inflation is under control for now, it could rise again.

"We're not talking about inflation pushing back up to 7 per cent like we saw in 2022, but the Reserve Bank’s own forecast published yesterday had inflation pushing up to about 2.7 per cent later this year."

Domestic uncertainty amid global stressors

Orr says economic growth is expected to continue this year, and low interest rates will encourage spending, which is good news for the job market.

"Unemployment is broadly around its peak and will begin to decline quite rapidly over the second half of this year."

In December, the unemployment rate tipped to a four-year high of 5.1 per cent, but for Pacific communities, it was almost double, at 10.5 per cent.

Labour Party deputy leader Carmel Sepuloni says this is bordering on a crisis.

“That is a huge increase in Pacific unemployment, 1 in 10 Pacific people in New Zealand are now unemployed.

Home ownership rates are seen as an indication of economic health. Photo/File

“Instead of supporting our people into work, this Government chooses to slash funding for frontline services, cut public sector jobs, and has left a total of 33,000 more people out of work.”

Orr says the Reserve Bank's decision comes amid geopolitical tensions and questions about whether tariffs will impact New Zealand's export products.

"Globally, economic growth is expected to remain subdued in the near term.

"Geopolitics, including uncertainty about trade barriers, is likely to weaken global economic growth."