Reserve Bank Governor Adrian Orr explained what the decision to cut the OCR by 50 base points means for New Zealanders. Video / RBNZ
Opinion by Matthew Hooton
Matthew Hooton has over 30 years’ experience in political and corporate communications and strategy for clients in Australasia, Asia, Europe and North America, including the National and Act parties and the Mayor of Auckland.
The Reserve Bank cut the Official Cash Rate (OCR) by 50 basis points in its February Monetary Policy Statement.
House prices are expected to rise by the election, benefiting the incumbent government.
Risks remain if inflation rises due to a falling dollar, potentially leading to higher rates.
The Government’s re-election strategy has always relied heavily on the economy clearly returning to the long-run trendline – a “reversion toward the mean” – before 2026.
All the Government’s energiser-bunny behaviour in the meantime – digital nomad visas, going for growth brochures, tourism slogans andinvestment summits – is mostly about creating a link in voters’ minds between the Government and what statisticians tell us was almost certainly going to happen anyway.
Wednesday’s Monetary Policy Statement (MPS) by the Reserve Bank strongly supports the political bet paying off. If anything, it helps National and its allies that the post-Covid recession happened under their watch in 2024 rather than Labour’s in 2023, since that should place the reversion towards the mean closer to voting day.
Because 2024 growth was much worse than the Government hoped, growth in 2025 and 2026 is now picked to be higher than forecast just three months ago.
Largely, that’s because the Reserve Bank now thinks it will cut the Official Cash Rate (OCR) faster through 2025 than it believed in November.
Wednesday’s 50-basis-point cut to 3.75% was well-signalled and priced-in, but the bank now picks the OCR to reach 3% by the end of this year, previously thinking it wouldn’t get there until 2027, after the election expected in October 2026.
New two-year mortgages peaked at about 7.6% in October 2023. When the median-voter family, that took out a $500,000 mortgage back then, refixes it this October, they’ll be about $380 a fortnight better off.
That’s a pretty solid reason for median voters to stick with National in 2026, having voted blue in 2023 after backing Labour in 2020.
Even better, while the Reserve Bank now thinks house prices will fall a bit in 2025, which may make first-time buyers happy, it still believes they’ll be going up through election year.
Whatever the macroeconomics, don’t let anyone tell you rising housing prices aren’t good for incumbent New Zealand governments. When they go up, governments get re-elected, with few if any economic indicators so closely correlating to a governing party’s poll results.
Yet the real economic gain if the OCR falls as fast as the Reserve Bank now thinks – and therefore an additional political gain – is that it should fuel greater investment to help meet the Reserve Bank’s growth forecasts between now and late 2026.
The bank continues to think unemployment will peak at 5.2%, up just a smidgen from the 5.1% in December. There may be around 160,000 unemployed people right now, but that will fall below 140,000 by the election.
Prime Minister Christopher Luxon. NZME photo / Mark Mitchell
Just as Governments take credit for falling interest rates, Christopher Luxon will be able to claim the new jobs are all thanks to his investment summit.
The economy’s reversion towards the mean is being led by the agriculture sector.
Fonterra farmers are on track to receive a record $10 per kg of milk-solids this season, nearly 30% more than last year, while paying lower interest rates. Beef prices are also looking up.
Part of that is because of bad news, that the New Zealand dollar has fallen nearly 6% on the trade-weighted index since the start of the financial year, and over 6.5% against the United States dollar.
We’re all poorer, but beggars can’t be choosers and with no one believing we’ll ever run a current account surplus with the rest of the world, beggars is what we are.
The lower dollar means farmers will also have to pay higher prices for feed, tractors, equipment, domestic transport, and international freight, but the Government will be hoping they spend a lot of their bonanza domestically, so the money spreads to the cities.
For city dwellers, the good news - as a senior farming leader told me last week - is that farmers tend to overreact to both good and bad changes in their net profits. With the latest Federated Farmers survey finding farmer confidence is at a 10-year high, we can expect them to splash out even more on the things Auckland, Hamilton, Tauranga, Christchurch, and Dunedin have to offer.
Yet the Government must also be wary of risks.
The Reserve Bank doesn’t have much of a reputation for being right over the last few years. Its critics argue it overreacted to Covid and kept the OCR too low for too long.
Then, the critics said, after it belatedly took inflation seriously, the bank kept the OCR too high for too long, causing last year’s recession to be worse than it needed to.
Some will argue it indicating faster OCR cuts than previously expected may yet prove to be another example of it being less prudent than it ought to be.
The OCR is already lower than its US equivalent, driving the fall in our dollar.
Back in November, it was accepted that gap would remain through 2025. But US inflation rose in January, and by more than expected, to 3%.
Further US interest rate cuts are now uncertain, and rates are expected to be higher through 2025 than previously thought.
That will mean the gap between our rates and theirs will be even greater than previously thought, driving our dollar even lower.
That may be even better news for farmers and other exporters in the very short term, but it would also drive our inflation higher than expected.
That doesn’t just include the cost of imports such as cars and petrol. A falling dollar also drives up the cost we pay in local supermarkets for butter, cheese, meat, fruit, vegetables, fish, and other locally produced products that we export.
Milton Friedman taught us, correctly, that “inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output”.
But, if the Reserve Bank is not vigilant, inflation can sneak back into New Zealand via imports and the things we export, driving up general inflation and leading to higher interest rates than now forecast.
Perhaps that very fear may be useful in encouraging us all – farmers included – to be more prudent than we might otherwise be as the economy reverts back towards the mean.
We better hope so, because if inflation does creep back in via a falling dollar, that would risk the Reserve Bank having to raise interest rates in election year, cutting families’ disposable income, keeping unemployment higher and causing house prices to fall, less than a year since Luxon claimed credit for rates falling.
And you know what that means, don’t you? The only winner would be Chris Hipkins and his allies to his left.
