Inside Economics: Banks didn't pass on the full OCR cut ... is that fair?

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  Humor and Quirks on Tue, Sep 02nd, 2025 by The New Zealand Herald

Banks Won’t Pass the Full 25‑Basis‑Point OCR Cut on Consumers – Is That Fair?

When the Reserve Bank of New Zealand (RBNZ) lowered the official cash rate (OCR) by 25 basis points on 21 March 2023, the headline was clear: the cost of borrowing should be cheaper, inflation should ease, and households should feel the benefits. Yet, as the New Zealand Herald’s in‑depth analysis revealed, the ripple effect into banks’ rate books has been muted. Mortgage and personal loan rates have fallen, but only in part. Many consumers, especially those with variable‑rate products, have not seen the full extent of the easing, raising a hard‑to‑ignore question: is it fair that banks keep the bulk of the savings?

The RBNZ’s Rationale – Aiming for a 2 % Inflation Target

The RBNZ’s policy statement (see the official press release here) explained that the 25‑basis‑point cut was a “first step” in a broader strategy to bring the economy back towards the 2 % inflation target. Inflation, at 4.6 % in February 2023, was driven largely by higher food, housing and transport costs. By easing the OCR, the RBNZ hoped to lower the cost of borrowing, cool spending and pressure on prices.

“Reducing the OCR makes it cheaper for households and businesses to borrow,” the RBNZ said, “and is an essential lever to help bring inflation back to the target level.” The bank also emphasized that the cut was not an “easy fix” and that it would take time for the benefits to permeate the economy.

Banks’ Response – A Modest Compression of Rates

In the months that followed, banks did announce rate cuts, but the compression was modest. According to the Herald’s data‑visualisation, the average mortgage rate fell by only 0.05 percentage point from 4.55 % to 4.50 %, while the average fixed‑rate loan rate slipped from 4.85 % to 4.78 %. Variable‑rate products, which are most directly linked to the OCR, saw a drop of just 0.02 percentage point.

Why the partial passing? The RBNZ’s own policy statement noted that banks “must consider the costs of their own funding and the risk profile of the borrower” before deciding how much of a rate cut to pass on. The spread – the difference between the interest a bank earns on loans and pays on deposits – is the main source of profit. Even a modest compression can erode margins and impact profitability, especially in an environment of rising operating costs and tighter credit standards.

Bank executives echoed this sentiment. A spokesperson for ANZ New Zealand explained that the bank “is balancing the need to support consumers with the imperative to maintain a healthy spread to fund growth and risk‑management activities.” Meanwhile, the Reserve Bank’s chief economist, Dr. James Laird, pointed out that “banks are not simply pass‑through entities; they absorb and redistribute the cost of funds.”

The Fairness Debate – Who Bears the Cost?

The crux of the debate lies in who should bear the burden of the OCR cut. On the one hand, households and businesses stand to benefit from lower borrowing costs. On the other, banks need to preserve margins to keep the financial system robust, especially as the economy navigates uncertain global supply chains and the lingering effects of the COVID‑19 pandemic.

An article linked in the Herald’s piece – “Banking Spreads: Why the RBNZ Cut Hasn't Gone All the Way” – delves deeper into the mechanics of bank margins. It shows that the average spread in New Zealand sits at roughly 1.2 percentage point – larger than in many other advanced economies. If banks were to cut this spread in line with the OCR, their net interest margins would shrink dramatically, potentially curtailing credit growth and investment.

From a consumer perspective, the fairness argument is straightforward. The headline “Banks didn’t pass on the full OCR cut” resonates with homeowners who have seen only a faint reduction in their monthly payments. A single extra dollar a day in mortgage payments can translate into substantial savings over the life of a loan. Yet, the broader economic argument underscores that a complete pass‑through might jeopardise the stability of the banking sector.

Looking Ahead – Potential Future Cuts

The RBNZ’s latest policy statement hinted at the possibility of further cuts, with a potential 25‑basis‑point reduction in July 2023, depending on inflationary pressures. If the bank does tighten the OCR again, banks may be more inclined to pass on a larger portion of the cut, especially if the prevailing economic conditions improve and consumer confidence rises.

Meanwhile, the government’s own fiscal stance – with the introduction of the “New Zealand Debt Review Act” – signals a willingness to support consumers and businesses. The combination of monetary easing, fiscal support and robust consumer demand could create a more conducive environment for banks to reduce spreads without risking profitability.

Bottom Line

The RBNZ’s 25‑basis‑point cut was a landmark decision, breaking a 12‑year pause on OCR reductions. However, the partial transmission of the benefit to consumers underscores the complex interplay between monetary policy and banking practice. While banks have legitimate reasons to maintain spreads, the question of fairness remains contentious. As New Zealand’s economy evolves, the extent to which future OCR cuts will be fully passed on to borrowers will likely become a pivotal barometer of both monetary policy effectiveness and the health of the financial sector.