Pausing while pass through of interest rate cuts catches up
Adding to the RBNZ’s cautious OCR approach and pause on cuts this month is the full impact of the large interest rate reductions over the past year is yet to be felt.
Monday, July 14th 2025, 10:40AM 
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by Sally Lindsay
Although the OCR has fallen 225bps since August, the latest data available shows the average rate borrowers were paying had only fallen around 50bps in May, Satish Ranchhod, Westpac senior economist says.With about 90% of New Zealand mortgages fixed for a period, many borrowers are still on the relatively high interest rates that were on offer in recent years.
In addition, earlier this year many borrowers rolled on to shorter term fixed rates (up to six months) while they waited to see if longer term interest rates would continue to fall further.
As shorter term rates have tended to be more expensive, that’s delayed the full impact of rate cuts for many borrowers.
“While the pass through of rate cuts has been gradual to date, it will pick up through the back part of the year,” Ranchhod says.
Over the next six months close to half of all fixed-rate mortgages will come up for re-fixing. “That will give many borrowers the opportunity to shift to a much lower mortgage rate.”
Compared to this time last year, the one-year fixed mortgage rate is around 200bps lower, while the two-year fixed mortgage rate is around 180bps lower than in 2023.
Ranchhod says before deciding whether to cut rates further, the RBNZ will want to see how demand in the economy is shaping up as increasing numbers of borrowers refix their mortgages.
“Not all of the reduction in interest costs will be spent – some households will increase their savings and others may choose to paydown debt faster.
“Even so, the fall in borrowing costs still signals a significant lift in many households’ disposable incomes over the coming months, and we expect that will help to boost sentiment and spending through the back part of the year,” he says.
“There remains a sense that one to two more 25bp cuts is still high in the minds of the RBNZ’s Monetary Policy Committee.
“Perhaps the hawks will see the risks as being in the zero to one cut range, while the doves might see at least one and perhaps two 25bps cut by early next year.”
Westpac continues to expect one further 25bp cut in this cycle, delivered at the 20 August Monetary Policy Statement.
However, the extent and pace of any further reduction will be dependent on the evolution of economic data, Ranchhod says.
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