Borrowers betting on OCR drop

Tuesday, 6 August 2024

Reserve Bank Governor Adrian Orr answers questions about the OCR rate earlier this year.

Mortgage holders are taking a gamble and fixing interest rates for shorter terms in anticipation of an early official cash rate slash.

Reserve Bank of New Zealand Te Pūtea Matua (RBNZ) data shows a steady increase in the number of borrowers fixing interest rates for three months to a year since February.

BNZ chief economist Mike Jones said the preference for shorter terms means “the overall mortgage book is now quite short” with about 64% of mortgages due to be reset in the next 12 months.

“That’s well above the 51% average run-off rate going back to 2017… despite mortgage rates having peaked around the start of the year,” Jones said.

Reserve Bank governor Adrian Orr still believes inflation will drop to usual levels towards the end of 2024.

“Borrowers have shortened their borrowing terms despite the extra upfront cost.”

But Jones said, “There were always two-sided risk to this strategy.”

He said BNZ’s forecast is that interest rates have a little further to rise before the expectation to flatten around 6.5% towards the end of this year.

“It's another reason not to expect any immediate change in the fortunes of the presently weak NZ economy, even as interest rates start nudging lower,” Jones said.

However, Kiwibank chief economist Jarrod Kerr said an uptick in short-term fixes should be enough for the central bank to slash the OCR.

“They need to catch up with the data. The time to cut is in August,” Kerr said.

“The economy has turned. We need rate relief now, not later.”

Kerr said the bank has seen about 70% of borrowers fixing for less than a year.

Kerr said the bank expects that mortgage rates have peaked so households and businesses are now positioning themselves for interest rates to start falling.

“There is a risk in fixing for six months if interest rates go up. That is a possibility but we’re not expecting that,” Kerr said.

He said dropping the OCR at the end of this year will be a “massive step for the RBNZ”.

Westpac senior economist Satish Ranchhod says the bank has updated its forecast for an OCR slash.

The RBNZ has kept the OCR at 5.5% since mid-2023 and stated in its July review that “monetary policy will need to remain restrictive”.

“Restrictive monetary policy has significantly reduced consumer price inflation, with the committee expecting headline inflation to return to within the 1% to 3% target range in the second half of this year,” the review said.

Westpac senior economist Satish Ranchhod said the bank readjusted its OCR forecast today, now expecting an OCR slash down to 5.25% in October followed by a series of cuts in November.

“We have started to see some pressure coming off mortgage rates slowly. It normally takes about a year to 18 months of interest rate reductions to flow to the economy,” Ranchhod said.

“But with borrowers on relatively short fixed periods, we’re likely to see relief faster.”

He said mortgage borrowers are taking on the risks of a short-term refix in anticipation of a pay-off later in the year.

Westpac expects a further 0.25% cut in November which would bring the OCR to 5% by the end of the year.

“Our longer-term forecast for the OCR is unchanged, with the OCR to fall to 4.5% at the May 2025 Monetary Policy Statement and for it to reach our current estimate of the terminal rate of 3.75% in early 2026,” Westpac chief economist Kelly Eckhold said in the forecast.