What are NZ banks planning to do with interest rates?

Friday, 19 July 2024

Inflation falling, calls for interest rate cuts

Banks say mortgage rates could fall by up to 2% over the coming year

That would cut some fixed rates from 7% to closer to 5%

But when and how much rates fall depends on what the Reserve Bank does with the official cash rate

Borrowers could be in a much more comfortable position by this time next year, with banks tipping mortgage rates to fall by up to 2% over the next 12 months.

But how dramatically rates fall depends on what the Reserve Bank of New Zealand (RBNZ) does with the official cash rate (OCR).

The BNZ has become the latest major bank to trim its fixed retail home loan rates, following ANZ.

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The OCR drives the rate banks pay when they borrow from the central bank and is the main influence on mortgage and deposit rates.

Banks are tipping mortgage rates to fall by up to 2% over the next 12 months.

Kiwibank chief economist Jarrod Kerr said the bank had long predicted the RBNZ would begin to cut the OCR in November.

That view had been an outlier among economists, but was now the consensus, he said.

“There’s been a lot of data and surveys pointing to a very weak economy and softening inflation pressures.

“Beyond November we have the RBNZ cutting by 25 basis points at every meeting until they get back to neutral around 2.5% to 3%.”

Kiwibank chief economist Jarrod Kerr says mortgage rates could fall from aound 7% to closer to 5% once the RBNZ begins to cut the OCR.

Cuts of that scale could lead to mortgage rates of 7% falling closer to 5%, Kerr said.

Westpac’s revised OCR forecasts, released on Wednesday, showed an initial cut of 25 basis points in November, followed by similar cuts at each meeting until May 2025.

That would take the OCR 100 points lower, to 4.5%, Westpac chief economist Kelly Eckhold said.

“After that we see the RBNZ moving more slowly at each monetary policy statement which means 2025 ends at 4%.”

Mortgage rates should move ahead of OCR changes, as markets usually anticipated the RBNZ, and forecast changes were “already more than priced in.”

“This is one reason that fixed rate mortgages have already adjusted a bit.”

While he believed the current OCR of 5.5% was fair, its use by date was “fast approaching,” Eckhold said.

“Inflation will soon be below 3%, giving room for the RBNZ to move the OCR down from its current restrictive level to something less restrictive.

“Interest rates are likely to remain above the average levels seen prior to Covid as inflation looks likely to take a while to revert fully to 2%.

ASB chief economist Nick Tuffley says fixed rates have already fallen from peaks late last year.

“My view is we won't fully get there and we will end up with inflation averaging slightly above 2% as was the norm in the 15 years prior to the 2008 Global Financial Crisis.”

Some adjustment in the inflation target could be made to align New Zealand with Australia, he said. The Reserve Bank of Australia has a target inflation range of 2% to 3%, while the RBNZ’s target is 1% to 3%.

ASB chief economist Nick Tuffley said mortgage rates were expected to fall over the next year and fixed rates had already come down from last year’s peaks.

The main driver of those fall was the growing expectation that the OCR would fall from its current level fairly soon, he said.

“We expect the RBNZ will start to cut the OCR from October. It could be earlier or later, depending on just how quickly the RBNZ judges inflation will keep falling back into the target range.”

Longer-term rates ‒ those over three, four and five years ‒ were already reflecting a lot of the expected decline in the OCR.

“These rates are in effect building in a period in which the OCR will be closer to a more normal level of say around 3%, Tuffley said.

“As the OCR falls, we would expect to seeing floating mortgage rates fall in line with that, and the six-month to two-year mortgage rates also fall further as the OCR comes down.”

Globally, many developed countries had experienced a period of relatively high interest rates as inflation had been “very strong” after so much economic stimulus was put in place to combat the impacts of Covid-19.

However, it was “increasingly clear” that the RBNZ was getting on top of inflation and would be in a position to cut interest rates, Tuffley said.

If the OCR fell within the next few months, there would be scope for both mortgage and deposit rates to be lower by the end of the year.