Major banks have started cutting rates! New Zealand's monetary battle through the lens of expectations: looking three moves ahead

As the Reserve Bank of New Zealand prepares to announce its Official Cash Rate (OCR) decision this Wednesday (28 May), New Zealand stands at a turbulent economic crossroads. Although markets widely expect a modest cut of 25 basis points to 3.25%, the debate, divisions and uncertainty surrounding the decision extend far beyond a simple choice between cutting and holding.

 

BNZ leads the rate cuts

 

On the eve of the Reserve Bank of New Zealand's announcement, BNZ moved first today, cutting its floating rate by 25 basis points to 6.44% and sharply reducing fixed rates at the same time. Its 18-month, two-year and three-year rates fell to 4.89%, 4.95% and 5.09%, respectively. BNZ has now secured a broad interest rate advantage among the major banks.

 

Although wholesale swap rates have not moved significantly, this early move still shows that banks are squeezing their margins to compete for borrowers. Competition is particularly fierce amid subdued property sales and high listing inventories.

 

Tella Mortgages head Andrew Chambers said banks had largely priced in the rate cut, and fixed rates were unlikely to return to levels starting with 3. “But we are back in a low-interest-rate environment. Borrowers could consider staggering their fixes across medium- and long-term rates to hedge against future uncertainty.”

Academics and bankers divided: keep watching or act quickly?

 

Most members of the New Zealand Institute of Economic Research's (NZIER) “Shadow Monetary Policy Committee” support a modest rate cut, but remain divided over whether more aggressive action is warranted.

 

Kiwibank Chief Economist Jarrod Kerr said bluntly that the current OCR of 3.5% “remains too restrictive for a New Zealand economy just emerging from recession”, advocating a single cut of 50 basis points. Meanwhile, Westpac's Kelly Eckhold argues that current inflation conditions do not yet justify significant easing, recommending no change while waiting to see whether global economic effects actually feed through to New Zealand.

 

Former Reserve Bank of New Zealand Chair Arthur Grimes warned that acting hastily amid extreme global volatility could mean “having to reverse course and raise rates” later, further increasing market uncertainty.

 

External disruptions: tariffs and global uncertainty

The current interest rate path is constrained not only by domestic economic trends but also by global developments. In particular, erratic US tariff policy has become a major “black swan” for the Reserve Bank of New Zealand as it formulates monetary policy.

 

ASB Chief Economist Nick Tuffley said: “The biggest challenge is how to factor uncertainty over White House policy into the current environment of somewhat accommodative rate cuts.” He predicts room for the OCR to fall to 3%, but says the road ahead will be a “bumpy ride”.

 

BNZ Chief Economist Mike Jones expects the OCR to fall further to 2.75% this year. However, he stressed that the Reserve Bank would continue to communicate a position of “heightened uncertainty” to prevent markets from becoming overly optimistic.

 

Infometrics CEO Brad Olsen said that if government fiscal stimulus falls short of expectations, the Reserve Bank may have “greater reason to lower the OCR to 3%”, while acknowledging that “the Reserve Bank of New Zealand will not rush ahead”.

The housing market: confidence improves, but prices stand firm

 

Although sales volumes have risen slightly, house prices remain flat. Mike Jones said: “There is certainly more confidence in the market, but this mainly reflects buyer sentiment rather than an actual rebound in prices.” High inventories mean sellers remain under pressure.

 

Cotality (formerly CoreLogic) Chief Economist Kelvin Davidson warned that continued OCR cuts may be unrealistic, given that CPI inflation has risen from 2.2% to 2.6%. Continued weakness in the New Zealand dollar would also bring imported inflation pressures. “If the Reserve Bank senses inflation is picking up, this week could be the last rate cut.”

 

First-home buyers take the plunge: low-deposit loans become mainstream

 

The stimulus that lower rates provide to homebuyers is also reflected in greater risk appetite. The latest data shows that as many as 40.6% of New Zealand first-home buyers in April 2025 chose low-deposit loans, with deposits below 20%. This proportion has risen significantly from 25.2% in 2015.

 

The data shows these buyers paid an average of NZ$713,000 for their homes, compared with just NZ$657,000 for buyers with standard deposits. More concerningly, the average loan for low-deposit buyers has exceeded NZ$640,000, substantially higher than for other groups.

 

With the economic outlook still unclear, such highly leveraged borrowing undoubtedly magnifies the potential risks of future market volatility.

 

To cut or not to cut? More than an economic question

 

This Wednesday's Reserve Bank of New Zealand decision may appear to be a minor adjustment of just 25 basis points. In reality, it has become a focal point where the monetary policy path, international politics, housing market expectations and consumer sentiment converge.

 

Can rate cuts be a cure for stimulating the economy, or will a rebound in global inflation turn them into a poisoned chalice? Should the Reserve Bank accommodate today's realities or prepare for tomorrow's uncertainties? This monetary battle, requiring each move to be considered several steps ahead, has only just begun.

 

For ordinary households, a clear understanding of their own finances matters more than interest rates. Avoiding blind borrowing and hopes of a policy cure-all is the way to move steadily through this uncertainty.