The OCR is up for review again on 9th July 2025.

While opinions are somewhat divided, the overall feeling is that the OCR will be reduced again to continue the work to stimulate the economy.

But why don’t interest rates drop as quickly as the OCR?

Let’s look into why that is.

Why Don’t Interest Rates Drop As Quickly As The OCR?

Back on 28th May, the OCR was reduced from 3.5% to 3.25%. That was a reduction of 0.25%, however, we didn’t see anywhere that level of reduction in interest rates across the board. That’s because, when the Reserve Bank cuts the OCR, interest rates don’t always follow exactly.

Here’s why:

1: Banks Have Other Costs

Banks don’t set their mortgage rates based on the OCR alone. They also borrow money from other sources both locally and internationally. These factors can all impact borrowing costs:

• Global interest rates
• Credit risk
• Exchange rates
• Market demand

If the cost of borrowing internationally stays high, banks might not be able to pass on the full OCR cut to their customers.

2: Deposit Rates Need To Remain Attractive

In order to lend money out, banks need people to put money into their system via savings accounts and term deposits. This is a careful balance of having the right money flowing in and out.

The balance can be upset easily if mortgage rates fall too far. It would mean the banks would also have to lower their deposit rates. This is less attractive for savers. If deposit rates fall too far, savers may take their money elsewhere and the banks would lose a source of funding.

So, to keep deposits flowing in, banks may not cut mortgage rates to the same level as the OCR.

3: Market Conditions and Risk Management

Banks will always need to balance customer interest rates with their own profit margins. They are running a business after all! When times are uncertain or when the housing market is soft (like it is currently), banks may choose to hold interest rates a bit higher to manage their risks.

4: Competition and Demand

If the market does not call for it, we won’t see huge drops in interest rates. When banks are vying for business from each other, they may be more aggressive with their rate cuts. However, then there is less competition in the market, there is a lower demand for loans, or they are worried about loan defaults as a result of economic uncertainty, then rates may only reduce slightly.

What does it mean?

As you can see, an OCR reduction will not automatically translate to an instant reduction in interest rates. However, it will usually trigger some downward movements in interest rates, even if it is only a modest reduction.

The Impact Of Reduced Interest Rates

Collectively, New Zealand’s mortgage payments are about to fall by about $3 billion! That’s because around 70% of mortgages will reprice in the next 12 months.

This is good news and economic recovery is thought to be on the way, but currently the recovery is not quite meeting expectations. What was once ‘survive til 25’ may have migrated to ‘it’ll be fixed in 26’!

The NZ housing market is still very subdued. In fact, house price growth has even been described as “glacial”. House price forecasts are only predicted to grow between 2% and 4% this year.

While this does impact your current asset, it can also create opportunities for investment with lower prices sticking around. With lower interest rates in play, it could be time for a chat with a trusted mortgage advisor to see what your options might be.

Will The OCR Drop Further?

While there have been modest reductions in interest rates in recent weeks, will these reductions continue to happen? Well, that all depends on how the economy fares and what the next OCR decision is on 9th July.

“At the moment, the OCR is at 3.25%, having been dropped from 5.5% since August last year. Financial market pricing is suggesting at the moment that the OCR might not go much lower than 3.0%, if indeed it does go lower than that at all.” [source]

However, ANZ economists maintain that the OCR could still drop as low as 2.5% in the coming months as they believe the economy needs more stimulation. In opposition to that is the threat of inflation rising beyond 3% (the absolute top of the band that the Reserve Bank want to maintain), and the fact that GDP figures came in higher than what most forecasters had predicted.

So, the jury is still out on what the decision might be on the 9th. It’s important to pay attention and seek advice from a financial expert before making any borrowing decisions this year.

What Should You Do?

If you’re not sure whether it’s the right time to fix or float your rate, or whether your current bank is offering you the best deal, the team at Mortgage Suite can help you compare options and make a smart, informed choice.

Reach out to us today to chat about your current interest rates and what could be done with your borrowing.