The 25-point cut to the OCR looks to be the last of the year, with forecasts that interest rates will start to trend upwards by 2027.
The Reserve Bank met market expectations with a 25-point cut to the official cash rate (OCR) at the final review of the year. However, the decision was not unanimous, with one member of the Committee voting to leave the OCR unchanged.
The Bank has shied away from indicating any further cuts, stating that future moves in the OCR will depend on how the outlook for medium-term inflation and the economy evolves. The forecasts in the latest Monetary Policy Statement show the OCR bottoming out at 2.2 percent in the June 2026 quarter, which, at face value, implies just a 20 percent chance of any further cuts in this cycle.
October’s statement by the bank had emphasised the economy’s weakness and many of the downside risks around economic growth. This statement is more positive, noting that economic activity is picking up, lower interest rates are encouraging household spending, the labour market has stabilised, and the exchange rate is supporting exporters’ incomes.
Balanced against these positive signs is the knowledge that the housing market and consumer spending have been less responsive to interest rate cuts so far than might have been expected, and businesses have been cautious in the face of uncertainty caused by international events. This more limited response could persist into 2026, but the Committee also discussed the possibility of a faster recovery next year if continued interest rate cuts spark the economy into life next year.
Gareth Kiernan from Infometrics said the Reserve Bank’s unwillingness to signal any further interest rate cuts in 2026 is partly a reflection of more positive economic indicators starting to come through over the last few weeks. The Committee is also likely to have been careful to ensure that this statement left the future policy direction open so that incoming Governor Anna Bremen is not unduly constrained at her first Monetary Policy Review in the new year.
The Bank’s forecasts see headline inflation easing to 2.1 percent pa by September next year, reinforcing expectations that the current lift in inflation to 3.0 percent pa is temporary. However, with year-end GDP growth forecast to reach 2.8 percent pa by the March 2027 quarter, spare capacity in the economy could reduce by two-thirds over the next 18 months. So if the recovery progresses as expected, there is little scope for inflation to ease below the two percent pa midpoint of the target band.
“We are comfortable with our position that 2.25 percent will be the low point for the OCR in this cycle. By the time of the next review on 18 February, we expect further positive indicators will make it clear the economy is recovering and that no further cuts are necessary,” said Kiernan.
“The Bank’s forecasts show interest rates starting to trend upwards by the first half of 2027, as activity levels get closer to the economy’s potential output. This outlook is broadly consistent with our view that the OCR will return to a neutral level of three percent by mid-2027.”
