PHOTO: FILE

A super-sized cut to New Zealand’s official cash rate (OCR) is on the horizon, with economists and financial markets anticipating a rapid reduction in borrowing costs. Following an initial 25 basis point cut in August, many now predict a more significant 50 basis point cut, which would bring the OCR down to 4.75%. This comes amid a challenging economic environment marked by slow growth and high inflation, leading experts like Westpac’s chief economist to support aggressive easing measures. Some, however, remain cautious, with a minority favoring smaller cuts to prevent long-term economic damage.

What is the OCR?

The Monetary Policy Committee (MPC) reviews the OCR 7 times a year.

The OCR is used to achieve and maintain price stability. To keep prices stable, the Government has set us an inflation target between 1% and 3% over the medium term with a focus on the 2% midpoint.

Increasing the OCR increases interest rates and helps bring inflation down.

A deeper reason for this potential rate cut lies in the complex interplay between inflation management and the need to boost economic activity. Retail rates have been impacted as well, with reductions in mortgage interest rates already noticeable. The Reserve Bank is under pressure to help relieve economic strain, as high interest rates have squeezed consumer spending, property values, and business profits, resulting in weak economic growth. Kiwibank’s senior economist argues that urgent rate relief is needed, emphasizing that current policy settings are “too restrictive” and risk dragging down future growth.

Despite the potential benefits of a larger rate cut, some experts remain cautious. The Institute of Economic Research’s Christina Leung and others who favor a more conservative 25 basis point reduction believe it’s important to assess the full impact of easing measures that have already been implemented. They highlight a noticeable rebound in business sentiment, cautioning against over-reliance on aggressive monetary policy shifts.

All eyes will be on the Reserve Bank this week as it releases its decision. If the expected 50 basis point cut materializes, it will signal a firm commitment to alleviating economic pressure while managing inflation expectations for the longer term. Yet, the debate remains lively, as experts weigh the risks of moving too fast versus too slow in adjusting the nation’s monetary policy.

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