The government’s latest interest rate cut wins cautious market approval, reports David Porter.
The government’s decision to push for a cut in the Official Cash Rate (OCR) has been broadly welcomed by economic observers.
The reduction by 25 basis points to 2.25 percent is seen by some as tacit recognition that the government’s efforts to curb inflation have yet to convince the market.
“I don’t think it’s an inflation story, so much as just prolonged waiting for the [promised] economic upturn to gain momentum,” Infometrics chief forecaster Gareth Kiernan told The News.
Gareth Kiernan
“What we are seeing with this cut and with the previous change in October is, they’ve just gone, what do we need to do to get the economy going, after having had disappointing outcomes,” he says.
“They’ve made the point that they think some of the stuff that would have got the economy moving with previous interest rates cuts last year, with the housing market and spending, just haven’t resulted in the economy being as responsive as the government might have expected.”
Kiernan says with inflation at around three percent, the government has had to tread carefully this year.
That was because there had been some concerns they let inflation get out of hand four years ago.
“They didn’t want to make the same mistake this time, so they just wanted to be careful.”
Kernan notes that a close look at the Consumer Price Index and the headline number suggests there were significant price increases like rates, insurance and electricity.
“But across the rest of the CPI, because there are such weak demand conditions, there’s more discounting going on and prices aren’t being passed on.
“Which is a very different situation to what we had four years ago when everything was rising.”
Kiernan suggests that this reflects concern on the part of New Zealand businesses.
“They are worried if they do try to lift their prices, there are risks that this would put people off more.”
Infometrics principal economist Nick Brunsdon recently wrote that a recovery is getting underway across most of New Zealand’s regions.
“The September 2025 quarter shows more meaningful economic gains across most regions, and the continued strength of the South Island.”
Strong primary sector returns are driving economic recovery for regional New Zealand, he says.
“Fonterra continues to forecast a strong dairy payout midpoint… Even if this figure falls, as the latest Global Dairy Trade auctions imply, farmers would still wind up with the second-highest payout on record.
“Returns for beef and lamb have increased too – at the expense of consumers buying mince – but boosting returns for dry stock farmers. Kiwifruit and apple growers are also earning a higher return on elevated export volumes.”
