Kiwibank has kicked off 2025 with a series of interest rate reductions, offering much-needed relief to borrowers grappling with high mortgage costs. These cuts come amid a broader trend of declining interest rates across New Zealand.
Starting today, Kiwibank reduced its six-month special fixed rate from 6.15% to 5.99%, its one-year special from 5.79% to 5.55%, and its two-year special from 5.59% to 5.45%. Borrowers who do not meet the 20% equity threshold for these special rates will also benefit, with the standard one-year rate dropping from 6.69% to 6.45%. These changes mark another step in the Reserve Bank of New Zealand’s (RBNZ) effort to stimulate economic activity, following several cuts to the Official Cash Rate (OCR) since mid-2024.
While rate cuts might evoke thoughts of a mortgage war, economist Ed McKnight of Opes Partners dismissed this notion. “It’s costing the banks less to borrow from other people and lend out mortgages. So, they are passing these cost savings on,” McKnight explained. He noted that banks are maintaining their profit margins even as interest rates fall, citing Reserve Bank data showing net interest margins remained stable or grew slightly in 2024.
Why Are Interest Rates Falling?
The reductions in mortgage rates stem from broader economic trends, including New Zealand’s ongoing struggle to recover from a prolonged recession. The country experienced a double-dip recession beginning in 2022 and faced the risk of a triple-dip in late 2024, driven by rising unemployment, declining consumer spending, and widespread economic hardship.
Adding to this, inflation, once the dominant concern, has been reined in significantly. The Consumer Price Index (CPI) fell to 2.2% in the third quarter of 2024, a dramatic decline from its 7.3% peak in 2022. With inflation no longer posing an immediate threat, the RBNZ shifted its focus from controlling prices to spurring economic growth.
To that end, the central bank made aggressive cuts to the OCR in 2024, reducing it from 5.5% to 4.25% in just three meetings. Another 50 basis point cut is expected in February, bringing the OCR down to 3.75%, with further reductions forecast for later in the year. Jarrod Kerr, Kiwibank’s Chief Economist, predicts the OCR could eventually reach 3.0%, a level considered “neutral” by the RBNZ.
These OCR cuts have had a significant downstream effect on borrowing costs for banks, allowing them to offer more competitive mortgage rates to consumers. As wholesale rates fall, banks pass on these savings to their customers, making it easier for individuals and businesses to manage their debt obligations.
A Boon for Borrowers
For mortgage holders, the decline in interest rates offers immediate and tangible benefits. Lower rates mean reduced monthly payments, easing financial pressure on households and freeing up income for other spending. Kiwibank’s new rates are particularly appealing for first-time homebuyers, who have struggled to enter the market amid high borrowing costs.
The impact extends to those looking to refinance their existing mortgages. With rates now dipping below 5.6% for certain fixed terms, many borrowers are likely to explore refinancing options to take advantage of the lower costs. As BNZ Chief Economist Mike Jones noted, 51% of all mortgage borrowings in New Zealand are due for a rate reset in the first half of 2025. This creates an opportunity for widespread financial relief as borrowers transition from higher fixed rates to the more favourable terms currently available.
Additionally, falling rates may help stabilise New Zealand’s beleaguered housing market. House prices, which have been under pressure for the past two years, are expected to recover in 2025 as lower interest rates make homeownership more accessible.
Economic Challenges Persist
While lower rates bring relief to borrowers, they also highlight deeper economic challenges. New Zealand remains mired in weak economic activity, with several key sectors still struggling. The construction industry, for instance, has seen a sustained decline in residential building activity, with output now 15% below its 2021 peak. Manufacturing, too, continues to contract, hampered by weak domestic demand and a slowdown in global markets.
Retail spending, meanwhile, has shown signs of stabilisation but remains subdued overall. Although recent months have seen modest increases in retail card spending, much of this activity has been concentrated on essentials like utilities and service bills rather than discretionary purchases.
The labour market, another critical indicator of economic health, remains under pressure. Rising unemployment has eroded consumer confidence, further dampening spending and investment. While confidence levels have begun to improve in anticipation of rate relief, it will take time for these shifts to translate into meaningful economic growth.
Broader Implications for the Economy
The RBNZ’s rate-cutting strategy is designed to stimulate activity across multiple fronts. Lower borrowing costs can encourage businesses to invest in expansion and hiring, while reduced household debt burdens free up income for spending. In theory, this combination should provide a boost to overall economic output.
However, there are risks associated with prolonged rate reductions. One major concern is the potential for the housing market to overheat. If rates remain low for an extended period, there is a risk that speculative activity could drive property prices to unsustainable levels, creating new affordability challenges down the line.
Another issue is the impact on savers and retirees, who rely on interest income from their investments. As rates fall, returns on savings accounts and term deposits shrink, potentially straining household budgets for those dependent on these income streams.
Moreover, New Zealand’s reliance on monetary policy as the primary tool for economic recovery underscores broader structural issues. While rate cuts can provide short-term relief, they do little to address underlying problems such as productivity stagnation, skills shortages, and weak export performance.
The Path Ahead
As Kiwibank and other lenders adjust their rates in response to the RBNZ’s policy moves, borrowers and businesses will need to remain vigilant. Financial advisors recommend that individuals review their mortgage terms and consider refinancing where possible to take advantage of lower rates.
At the same time, the government and private sector will need to collaborate on structural reforms to ensure that the current wave of rate cuts translates into sustainable, long-term growth. Investments in infrastructure, education, and innovation will be critical to building a more resilient economy.
In the short term, however, falling rates offer a glimmer of hope for a country still grappling with the aftermath of a prolonged recession. As RBNZ Governor Adrian Orr recently remarked, the goal is to “release the handbrake” on the economy and put it on a path to recovery. Whether this strategy will succeed remains to be seen, but for now, the signs of relief are beginning to emerge.