RBNZ Holds OCR at 4.75% as Banking Sector Profits Soar Despite Economic Headwinds
The Reserve Bank has held the official cash rate steady at 4.75% for the third consecutive review, while New Zealand’s major banks posted combined quarterly profits exceeding $2.1 billion. The decision comes amid growing criticism of banking sector margins and calls for increased competition in the retail banking market.
- OCR maintained at 4.75% following RBNZ’s April monetary policy review
- Combined big four bank profits hit $2.1 billion in Q1 2026
- Net interest margins expanded to 2.4%, highest level since 2009
- Business lending growth slowed to 1.2% annually
- Mortgage rates remain above 7% across major lenders
Reserve Bank Governor Adrian Orr signalled a cautious approach to future rate cuts, citing persistent inflation pressures in the services sector. “While headline inflation has moderated to 3.1%, core measures remain stubbornly elevated,” Orr told reporters following the announcement.
The decision to hold rates comes as New Zealand’s banking sector continues to benefit from elevated interest margins. ANZ, ASB, BNZ and Westpac collectively reported net interest margins of 2.4% for the March quarter, the widest spread since the global financial crisis.
ASB chief economist Nick Tuffley described the profit surge as “a natural consequence of the interest rate cycle,” but acknowledged growing political pressure over banking competition. “The sector is performing its role in transmitting monetary policy, though questions remain about the speed of rate pass-through to consumers.”
Margin expansion under scrutiny
Banking sector margins have expanded significantly faster than the OCR increases, drawing criticism from business groups and opposition politicians. According to RBNZ analysis, the finding showed retail lending rates have risen 425 basis points since the tightening cycle began, while deposit rates increased just 275 basis points.
“Banks are clearly benefiting from a lag effect where funding costs adjust more slowly than lending rates,” said Kiwibank chief economist Jarrod Kerr. “This creates temporary margin expansion that historically normalises over 12-18 months.”
Small business lending has contracted 3.2% over the past year, with many firms reporting difficulty accessing credit despite strong balance sheets. Manufacturing sector representatives have called for regulatory intervention to improve credit availability.
The Commerce Commission’s ongoing market study into retail banking competition has intensified focus on sector profitability. Preliminary findings suggest limited competition in business lending, particularly for mid-market companies seeking facilities between $1-10 million.
ANZ New Zealand chief executive Antonia Watson defended sector margins, noting increased provisioning for credit losses and regulatory capital requirements. “Our return on equity remains within historical ranges when adjusted for the current risk environment,” Watson said.
Future rate path uncertain
Financial markets are pricing in a 65% probability of a 25 basis point cut by August, though economists remain divided on timing. Westpac senior economist Michael Gordon expects rates to remain elevated through 2026’s second half.
“The RBNZ faces a delicate balancing act between supporting economic growth and ensuring inflation expectations remain anchored,” Gordon noted. “Banking sector profitability, while elevated, shouldn’t drive monetary policy decisions.”
Term deposit rates have shown signs of stabilising, with major banks offering 12-month rates around 5.25%. However, mortgage borrowers continue facing pressure, with average two-year fixed rates exceeding 7.1% across the major lenders.
The banking sector’s strong performance contrasts sharply with broader economic conditions, where business confidence remains below long-term averages and consumer spending growth has slowed to 0.8% annually.
