This week we have had the much anticipated Official Cash Rate (OCR) announcement and the release of the May 2025 Monetary Policy Statement – all 62-pages of it.
Of course here at Kiwi Edition we aim to provide simplified news and views, so we will keep this review much shorter.
The Official Cash Rate (OCR) Announcement
We say that this Official Cash Rate (OCR) announcement was much anticipated and it was. The expectation was that the rates would drop by 0.25% and most economists were predicting the same, but in the last 10-days we heard some calling for larger cuts as they believed that the economy was in need of a kick-start and that lower rates might help provide that.
The ‘interesting news’ was that the committee did not have a unanimous decision to cut by 0.25% with one of the members wanting to hold at 3.50%. The other five members voted for the 0.25% cut and no mention of a bigger cut.
The reality is that 0.25% was predicted by industry, and a couple of banks dropped their rates in advance of the announcement to get a bit of free advertising.
It’s important to consider that the OCR has now fallen 2.25% to 3.25% since August last year and the Reserve Bank lowered its forecast rate track.
It now projects an OCR of 2.85% by the end of the year – another 0.40% drop and down from a 3.1% forecast in February.
The May 2025 Monetary Policy Statement
Now this was really what everyone has been waiting for.
This is important for anyone that is watching the interest rates as it gives an indication into how the Reserve Bank sees the economy tracking and therefore the need to decrease rates further, to hold them or even to increase them. It’s the future that banks like to watch for setting the longer term fixed rates, and for top mortgage advisers to interpret so they can ensure they are giving the best advice.
Of course there are never guarantees, so everything is based on calculated guesswork.
I will try and summarise the May 2025 Monetary Policy Statement in a few short paragraphs:
Financial System Stability – while non-performing loans in the housing and small business sectors have increased in line with the past contraction in the economy, the banking system remains well capitalised and in a strong financial position to support customers. They are happy with this.
Inflation – has been a hot topic over the recent years, and the good news they are not concerned with this. New Zealand’s annual CPI inflation increased to 2.50% in the March 2025 quarter, largely in line with previous projections. It is now projected to increase to 2.70% in Q3 2025, then return to near the 2.00% target midpoint from 2026. This remains within the 1.00% to 3.00% target band.
They do have concerns that if they lowered the OCR further then consumer spending could lift
Economic Outlook – they reported that economic activity has started to recover following a contraction during the middle of 2024, and expect the economy will keep growing at a slower pace than previously assumed over 2025. Some of the key reasons given for this was the effects of the tariffs, lower immigration and a general lack of business confidence. We can see the results of this with a lack of consumer spending and a soft labour market.
On a positive note, they emphasised that there are some industries showing some good results.
International Influences – yes that’s mainly the tariffs which are causing havoc around the world.
Will Home Loan Rates Drop Now?
The answer is yes and no – the floating rates will drop straight away, and the 1-year and 2-year rates could drop within a week. The fixed rates will generally drop a little, but it depends a bit on how competitive the banks want to be.
Home Loan rates are not bad now, and we expect that they may drop a bit.
We know that the banks all have healthy margins and so could drop the rates once they see some stability in the economy, but they could be very targeted and choose to offer special deals for first home buyers, construction loans or business loans.
Some of the banks have already done this with some deals that we use a lot for first home buyers and new builds / construction loans.
It’s interesting when we look at what affects the rates:
- Floating rates – are directly affected by the OCR and we see these drop immediately
- Short-term fixed rates (1 and 2-year rates) – are influenced by the projections
- Longer term fixed rates (3, 4 and 5-year rates) – are based off wholesale rates in the USA
It’s not just the OCR that we look at, although that’s what we see in the news.
Things like the much anticipated Official Cash Rate (OCR) announcement and the release of the May 2025 Monetary Policy Statement make for good headlines, but it’s the fine-print that’s always more interesting.
In Conclusion:
The Reserve Bank now projects an OCR of 2.85% by the end of the year which is another 0.40% drop. Some bank economists’ have given their forecasts which have shifted to a low point of 2.75% or 2.50% by the end of the year.
That implies that we will see at least one more drop this year and maybe two, but there is still a lot of uncertainty.
We would love to see rates drop to within the 4.00% – 5.00% range later in the year and that would make mortgages a lot more affordable for Kiwis.
Let’s Talk About Your Options
Did you know it’s free to get advice on refixing your home loan?
We know that a lot of people just go and refix online with little or know advice, and this is what the banks encourage as it’s cheaper to process for them and people tend not to check the rates being offered.
When we review things for refixing a home loan we do also review the total mortgage to ensure that you have the best options and rates. We will also look at what you are paying, and can show you how to pay your home loans off faster too. This includes talking about the loan structure and where it’s best to put any extra money to have the best effect and to retain the flexibility so to not cause you issues later on.
Now that we have had the much anticipated Official Cash Rate (OCR) announcement and the release of the May 2025 Monetary Policy Statement we invite you to talk with one of our team and discuss your options.
