Kiwibank’s economists say it’s worth the Reserve Bank considering a .50 per cent drop as the US Federal Reserve has dropped its rate by this much and the Kiwi economy is in far worse shape.

Chief economist Jarrod Kerr says economic output contracted once again in the June quarter and the country has been in a per capita recession for the past two years.

“Monetary policy has done enough to free up spare capacity and restrain inflationary pressures. Enough is enough. A rate cut in October is as close to a done deal as you would expect.”

However, Kerr thinks the RBNZ will need to do more than the Fed next year because the Kiwi economy requires more rate relief. “We argue the RBNZ needs to get the cash rate below four per cent, ASAP. It takes up to 18 months for rate cuts to filter through the economy. We all love fixed rates, and fixed rates need time to roll off. Effectively, the RBNZ are cutting today for an economy at the end of 2025, the start of 2026.”

The financial markets are pricing in a series of rapid rate cuts, including at least one .50 per cent cut before the end of this year.

Westpac chief economist Kelly Eckhold expects the RBNZ will continue to move in measured 0.25 per cent steps, with a further .50 per cent of cuts this year and another 100 basis points over 2025.

“Stepping back and looking at the longer-term trends on a per capita basis, economic activity has now dropped back to the levels that we saw just prior to the pandemic,” Eckhold says.

Squirrel Mortgages founder John Bolton doesn’t think the RBNZ will go higher than a 0.25 per cent cut next month because of a positive uptick in activity across the housing market in response to the news of falling rates, as well as an increase in business and consumer confidence.

“So, the RBNZ will want to temper that enthusiasm, and even though our economic outlook remains weak, it will proceed with caution to avoid homeowners getting ahead of themselves.”

The outlook beyond October

There is one more OCR review before the end of the year (November 27), and most of the market is expecting that to bring another 0.25 per cent drop as well.

“If that’s the case, the good news for borrowers is that one-year rates should be sitting below 5.95 per cent by Christmas,” Bolton says.

“Then, we’ll have a bit of a break before regular programming picks up again in late February. And it’ll be at that point – assuming things are tracking in line with RBNZ expectations – that we may see some of those larger rate cuts start to come through.”

The official word from the RBNZ is that it will be late 2026 to early 2027 before it gets back to a neutral OCR of three per cent, although the market is forecasting it could happen as early as the end of next year.

If that’s the case it would mean there are significant falls to come over the course of 2025, and Bolton is picking that most of that will be front-loaded into the first six months.

Property market impact

As a rule, interest rates and house prices operate on a seesaw (when one goes down, the other goes up).

But even though buyers have started returning to the market in solid numbers since mid-August, that’s not expected to fuel a significant recovery in house prices, at least not yet.

The reason, according to Bolton and independent economist Tony Alexander, is that much of the activity is just a release of pent-up demand that’s been building over the last couple of years.

People put their plans on hold while they waited for interest rates and house prices to settle, and now that’s started to happen they’re stepping back into the market.

Once that demand has flowed through, the factors that might support a significant recovery in the housing market just aren’t there, Bolton says.

“Yes, interest rates are on the way down again, but they’re still high relatively speaking. And even once further relief flows through over the coming months, it’s going to take a while for people to recover from the last couple of years and rebuild savings buffers.”

In the short term, most households will focus on growing their savings and getting back to a good place before they start thinking about making big new financial commitments.

Alexander says the country is at a turning point in the house price cycle and one thing economists have learned from past cycles is that not all regions turn at the same time.

He says before anyone over-extrapolates surging buyer interest into newly soaring prices, it pays to remember what happened when the market turned for the better last year.

“Sellers eventually appeared in droves. In January and February this year the number of fresh property listings received by agents around the country soared in seasonally adjusted terms by 25 per cent and 16 per cent respectively.”

From his latest real estate agent survey a net 50 per cent of agents from just three per cent two months ago say they are receiving more requests for property appraisals.

“So, both demand and supply are rising at the same time. However, it pays to remember the stock of listings is about 30 per cent higher than a year ago, and at the highest level since 2015.”

Bolton says the supply-demand equation is definitely skewed in buyers’ favour. “Of course, there will still be buyers out there, but I wouldn’t expect house prices to take off anytime soon. Instead, once that initial demand has been met, the housing market should settle down and return to some sort of normal.”

He says prices could recover roughly five per cent or so over the next year, but he doesn’t think it’ll be any more than that.

“The silver lining is that it should mean we’re in for a stable housing market over the coming months and years.”