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Commodity prices are lifting. Farmgate returns are improving. And since mid-2024 the Reserve Bank has aggressively cut the OCR from 5.5% to 3.25%.

So why does the economy still feel like it’s stuck in neutral?

This one graph explains it.

While the OCR has fallen sharply, the average home loan rate is still sitting at 5.80%. That’s because most Kiwi mortgages were still fixing at the top of the cycle—and they haven’t rolled off yet.

Until they do, households are still paying “peak” interest bills in a “post-peak” economy.

Home Loan Floating Rate Products: The Structural Flaw

 Here’s where New Zealand’s system shoots itself in the foot.

Home Loan Floating mortgage rates are structurally un-competitive. Right now, the average new floating rate is about 6.50% (although banks typically discount this to 6%), while the 1-year (& 2 year) fixed rate sits at less than 5%. Both are funded largely from the same wholesale pool—yet the spread is massive. Why? Banks keep floating rates artificially high to discourage use. When customers fix, it becomes a “sticky” product, making them more likely to stay.

So almost no one floats their mortgage. They fix—and that means OCR cuts take a long time to filter through. In Australia, where most home loans float (as the rates are competitive versus fixed rates), changes pass through within weeks. In New Zealand, it can take well over a year to see the same effect.

This delay forces the Reserve Bank to swing harder and faster with the OCR, because they’re steering a ship with a 12-month lag. And that creates second-order problems.

 Bigger Swings. Weaker Confidence.

The sharper the swings, the shakier confidence becomes.

Even if the direction is right, the speed and scale of OCR changes can erode confidence—across households, farmers, and businesses alike. When rate policy feels erratic, people pull back:

• Homeowners stop spending, unsure of what’s around the corner.
• Small businesses delay investment, wary of cashflow shocks.
• Farmers pause capex or expansion, even with improving margins.

And then there’s the knock-on effect: High Home Loan Rates = Low Local Spend

With $350 billion of mortgages still priced for yesterday’s inflation fight, households are holding their wallets tight. That directly impacts local businesses—the very cafes, tradies, grocers and retailers that rely on discretionary spend.

We're seeing it extensively:

• Retail and hospitality spending is flatlining (and declining in some categories), especially in city centres.
• Residential construction has dropped dramatically.
• Layoffs are commonplace across consumer-facing sectors.
• Business owners themselves are under the pump, because many fund their operations via their own home mortgages. When their personal interest costs rise, it bleeds into the business.
• And collectively New Zealand loses its “appeal”, speeding up emigration and dropping immigration.

It’s all interconnected—and the drag is real.

What Needs to Change

 If we want OCR policy to be more effective and more confidence-building—we need to fix the transmission mechanism. That starts with making home loans floating mortgage rate products viable again. Here’s how:

1. Regulatory Scrutiny: Have the Commerce Commission or RBNZ review whether floating rates reflect fair margins over cost of funds.
2. Mandate Transparency: Require banks to publish floating vs fixed comparisons, showing how and why the rates diverge.
3. Innovate on Lending Structures & Products: Create flexible floating or hybrid products that offer downside opportunity without the premium pricing of the current floating rates
4. Boost Market Competition
   Encourage non-bank lenders, other new lending entrants and fintechs to introduce floating products that aren't priced like a punishment.

Until home loan borrowers can confidently float their loans—or at least access cheaper floating options—the OCR will remain a blunt, delayed weapon, and the economy will continue to respond slowly and unevenly.  

This impacts not juts housing- but all parts of the NZ economy as farmer and businesses are forced to ride an unnecessary rate roller coaster to get manage inflation.    

In Summary

 Farming is outperforming. But the rest of the economy is still catching up, held back by a mortgage market that delays the benefits of interest rate cuts. The bulk of New Zealand’s $350 billion mortgage market is stuck in neutral.

If we want a faster, smoother recovery—one that flows from the paddock to the high street—we need to fix the system that connects monetary policy to real-world cashflow. Floating rates need to come back into play. Otherwise, every time the Reserve Bank turns the wheel, it’ll take another 12 months before the economy responds.