Private Property issue #146 - Reserve Bank cut the OCR another 0.5%

Yesterday afternoon, the Reserve Bank cut the Official Cash Rate (OCR) another 0.5%. 

The third big cut in a row.

So, what will happen to interest rates?

These banks are already cutting their rates

One bank anticipated the cut. TSB cut their 1-year rate the day before the OCR announcement. That’s now sitting at 5.35%. 

ANZ then cut their 1-year rate to 5.29% yesterday.

It was 7.39% 12 months ago. So ANZ’s 1-year rate is down 2.1%!

ANZ has also took the 2-year rate down to 4.99%. 

That’s sharp. Very sharp.

But, the OCR went down 0.5%. And the banks are cutting only 0.2 – 0.3% off most of their rates.

The reality is that banks had already priced in most of this cut. So, expect the banks to cut less than the Reserve Bank. 

It’s not the banks are stingy. They’ve passed on the cuts before Adrian Orr, the Reserve Bank Governor, got his scissors out to start cutting. 

Here’s the really good news…

Servicing test rates have also dropped off a cliff. This means you might be able to borrow more. 

Remember, test rates are what the banks use to figure out whether you can afford a mortgage or not. 

ASB dropped its test rate from 7.6% to 7.3%. Kiwibank went even lower – cutting to 7%. 

For context, if you could borrow $500k for an investment property on Wednesday morning, you might now be able to borrow $545k.

The Reserve Bank plans to cut the OCR faster 

The 0.5% OCR cut wasn’t a surprise. The Reserve Bank already told us they’d do it. 

But Adrian Orr still found a way to surprise and delight the market. 

The central bank now plans to cut the OCR faster than they previously thought.

3 months ago, they thought the OCR would be 3.5% at the end of 2025. Now, they think it’ll hit 3% by the end of the year.

If that happens, you’ll see the 1-year mortgage rate hit around 4.9%.

Just don’t get too excited about more big interest rate cuts. 

So far, the OCR has gone from 5.5% to 3.75%. 

A 1.75% drop since August last year. 

That’s down 0.3% per month (on average). 

Over the next nine months, the Reserve Bank expects only 0.75% of cuts. That’s an average of just under 0.1% per month. 

The next cuts (April and May) will likely be 0.25% each.

We’re just over halfway through this easing cycle. So expect the cuts to slow down. We’ve already come a long way.

Warning: Keep your eye on inflation

Inflation remains steady at 2.2%. It’s right in the Reserve Bank’s 1–3% target range. 

But inflation will likely go up this year. That’s because:

1. Imported inflation is currently negative. It’s bringing the cost of living down
2. Domestic inflation is still sitting at 4.5%.

Imported inflation (tradeable) won’t be negative forever.

The Reserve Bank expects inflation to tick up to 2.7% in late 2025. So expect to see a few scary headlines. 

Adrian Orr isn’t too concerned. He called it “noise” in the numbers at yesterday's press conference.

So, I don’t expect that the OCR will increase in response.

What does all this mean for you?

These interest rate cuts are good. It means cheaper mortgages and probably more money in your back pocket. 

But don’t hold your breath for even more big interest rate drops. Mortgage interest rates are already down over 2% since the peak. 

They will likely go down a tad. But, not by another 1%. Don’t expect a low 4% mortgage rate. 

On the other hand, if you’re looking to borrow, lower test rates could mean now’s a good time to talk to your mortgage adviser.