The Reserve Bank is anticipating a brighter 2025 ahead

One of the most significant news items on the economic and property market calendar over the past month or so was the Monetary Policy Statement (MPS) from the Reserve Bank on 27 November 2024. As many readers will know, the official cash rate (OCR) was cut on the day by 0.5% to 4.25%, with a firm indication that more OCR cuts lie ahead next year too. But what is the MPS (and the OCR), what else did it say, and how might things look in 2025?

First up, a quick discussion of the background. The Reserve Bank is basically responsible for two things in New Zealand: monetary policy and financial stability. The latter is all about monitoring the wider financial system, including banks and insurance firms, to ensure we keep on a stable footing and that the risks of major financial meltdowns (e.g. a bank failure) are mitigated.

Monetary policy is all about managing inflation (the rate of change in general prices such as food and clothing) to provide the best conditions for the economy to flourish. This is done via the official cash rate – which is decreased when inflation pressures are low, in order to get households spending again and get the economy moving. Lower interest rates make saving less appealing and borrowing more attractive, with the opposite moves playing out when inflation pressures are high.

At present, inflation pressures have fallen away again, after a long period where they were uncomfortably high. Hence, the Reserve Bank is easing monetary policy – or in other words, cutting the OCR. That then gets fed through into banks’ funding costs, with those reductions being passed on to households through reduced mortgage rates (as well as lower term deposit rates for those people with savings).

The Reserve Bank makes these decisions about the OCR every six weeks or so, alternating between a Monetary Policy Review (a short, written statement accompanying the decision) and a full, Monetary Policy Statement. The MPS contains detailed forecasts for many different factors, including economic growth, inflation, the OCR itself, employment and unemployment, as well as house prices.

So what else did the latest MPS indicate? As things stand, the Reserve Bank anticipates GDP/economic growth of around zero this year, but an improvement to 2-2.5% in 2025, with the falls in employment coming to an end over the first few months of next year and the unemployment rate peaking at 5.2% (currently 4.8% as at September 2024) around March 2025. In other words, there may still be a few testing months ahead, but as the economy responds to lower interest rates, general conditions should have improved for many households before the middle of next year.

Indeed, with the headline rate of inflation projected to stay at around 2% for the foreseeable future (the Reserve Bank’s policy target is to keep it between 1% and 3%), there are also further OCR cuts looking likely – possibly starting with another 0.5% fall on 19 February next year, followed by smaller/slower cuts thereafter as the OCR gets back to ‘neutral’ (i.e. a more normal level), which is estimated to be around 3% or slightly above.

With the economy improving, unemployment peaking, and interest rates coming down, the Reserve Bank also anticipates a rise in average house prices of around 7% next year. That’s decent growth, but certainly not a huge spike, with prices likely to be restrained to some extent by the caps on debt to income ratios for mortgage lending that banks now have to adhere to. However, lower mortgage rates themselves (maybe at a typical level of 5.5% or less pretty soon) will be a silver lining.