Interest rate cuts offer relief for families, but economists warn of inflation risks ahead

A senior economist warns that the Reserve Bank is facing a delicate balance between stimulating demand and preventing inflation after Wednesday’s announcement of further cuts to the Official Cash Rate (OCR).

In an interview on Pacific Mornings, Westpac senior economist Satish Ranchhod says that economic growth is expected to pick up later this year.

The OCR, which plays a key role in stabilising inflation, has fallen from 5.5 per cent to three per cent over the past year.

“If you go to reprice your mortgage now and you'd fix for a year, you're probably looking at a mortgage rate that's about 200 basis points lower,” Ranchhod says.

“If you've got an average mortgage, that'd put something like $300 to $400 a month back in your back pocket.”

The Reserve Bank has signalled that there will be two more reductions in the OCR this year.

The Reserve Bank is New Zealand's central bank. Its functions are: to act as the central bank for New Zealand, including by: formulating (through the Monetary Policy Committee) and implementing monetary policy. managing foreign reserves and dealing in foreign exchange. Photo/Supplied

“This could be quite a big support for a lot of households right now. The Reserve Bank is really waiting to see those effects, and that could be a big boost for employment and demand,” Ranchhod says.

Recent data from StatsNZ indicate that the current unemployment rate is 5.2 per cent, which has jumped by 0.5 over the past year.

Finance Minister Nicola Willis welcomes the OCR cut, saying it will increase construction activity, create jobs, and put more money in people’s pockets.

Finance Minister Nicola Willis. Photo/PMN News/Ala Vailala

“I know many families are still doing it tough, but the Reserve Bank’s view is that we are through the worst of it and the economy is starting to pick up,” Willis says.

“The Government’s responsible economic management is making a difference.

“Taking the pressure off inflation has allowed the Reserve Bank to lower the OCR when it needs to be adjusted.”

Watch Satish Ranhhod's full interview below

When discussing the economic conditions in New Zealand, Ranchhod describes the situation as mixed, with clearer signs of strength in rural regions.

“But if we look across the ditch in Australia, they've had some firmer activity over the past few years, but their economy is cooling right now as well.

“We're likely to see some soft conditions on both sides of the Tasman over the next few months.”