The government is hailing the latest cut as proof of recovery, but uneven growth is keeping the economy stuck in low gear, writes Catherine McGregor in today’s extract from The Bulletin.
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The ‘bob each way’ OCR cut
The Reserve Bank yesterday trimmed the official cash rate (OCR) from 3.25% to 3%, while signalling that two more are likely by the end of the year. The bank’s Monetary Policy Statement (MPS) said it saw the OCR falling to 2.5% by early 2026 – a sharper fall than the 2.75% low it envisaged in May. What made the announcement unusual, writes David Hargreaves of Interest.co.nz, was the division among the monetary committee: in only the third formal vote since the committee was created, two of its six members pushed for a deeper 50-point cut, to 2.75%. Acting governor Christian Hawkesby stressed that every future decision remained “live”, but the bank is now firmly leaning towards further easing. The split decision reflects “the emerging contrast between a flagging economy and rising inflation”, writes Hargreaves, and the challenge of boosting the former while not further spiking the latter.
Why not go harder?
The committee members urging a more aggressive cut argued that the economy is sputtering badly enough to justify faster stimulus. But the majority worried that a 50-point move would risk reigniting price pressures, particularly in light of last week’s stats showing food inflation running at 5%. The Reserve Bank’s mandate is to keep inflation within the 1–3% band, and the MPS expects the annual rate will be at 3% by the end of the September quarter.
In the end, officials voted to avoid moving too fast, too soon. Hawkesby said the downside risk of the decision was the slowdown lasting longer than expected, “and really needing more of a jolt and more aggressive action from us to right the economy”, RNZ reports. But by opting for a smaller cut, the committee bought itself time to observe how household spending, mortgage refinancing and wage growth responded before deploying heavier artillery.
A two-speed recovery
New Zealand’s increasingly uneven recovery further complicates the picture. As Liam Dann observes in the Herald (paywalled), the Reserve Bank can only set one cash rate for an economy that is currently running at two speeds. Urban centres are still burdened by sluggish housing markets and higher unemployment – Auckland’s jobless rate is over 6% – while rural regions are buoyed by strong export commodity prices. “If the RBNZ were just setting borrowing costs for Auckland and Wellington then the need for further cuts would be a no-brainer,” he writes. Meanwhile billions of dollars are flowing into the country through the primary sector. That should eventually stimulate growth, though “it looks like many farmers are using strong returns to pay down debt” rather than going shopping.
Cuts alone won’t cure deep-set weaknesses
For now, ministers are talking up the positives. Prime minister Christopher Luxon hailed the OCR cut as “fantastic news” for homeowners, while finance minister Nicola Willis said the Reserve Bank’s projections showed “objective data” proving that things were “absolutely getting better”. Yet the reality is more sobering. As Auckland University’s Rod McNaughton argues in Newsroom, citing a June IMF report, New Zealand’s economy is structurally skewed towards low-productivity sectors like finance and real estate. Too few of our fast-growing “gazelle” firms are in technology or ICT, unlike in countries such as Australia or Sweden. The result is an economy that grows by adding hours and people rather than lifting output per hour.
“New Zealand’s economy is not underperforming by accident,” McNaughton warns. “If we continue to reward property-backed expansion and underwrite financial returns in low-productivity sectors, we should not be surprised by the outcomes.”
