Reserve Bank set to hold OCR; mortgage rate declines to ease

Wednesday, 9 July 2025

The Reserve Bank is set to make its latest official cash rate (OCR) decision on Wednesday, but economists say it's unlikely to lead to another sharp drop in mortgage rates.

Since August last year the Reserve Bank has lowered the OCR from 5.50% to 3.2%, and mortgage rates have followed it down, falling from about 7.5% to about 4.9%.

But economists from the country’s five major banks, along with HSBC, Infometrics and NZIER, expect the Reserve Bank to hold the OCR at 3.25% this week.

That does not mean the OCR has hit the bottom of its cycle as most economists see any pause as temporary, and predict at least one, if not more, cuts to come.

For many homeowners, the big questions are what the Reserve Bank’s decision might mean for mortgage rates.

Opes Partners property economist Ed McKnight expected the Reserve Bank to hold the OCR where it is in order to see the impact of previous cuts come through more.

“I’m rolling off a 7% rate next week, and refixing at a lower rate will save me about $150 a week. There are lots of people like me, and the Reserve Bank will wait to see how it goes before cutting again.”

A quarter of fixed-term loans were due to refix in the next three months, Reserve Bank data shows, he said.

“Another 20% of fixed loans will be repricing in the three months after that, and all up 75% of fixed-term home loans will re-price within the next year. That should have a large impact on borrowers.”

Even if the Reserve Bank surprised with a 0.25% cut, it was unlikely banks would make massive cuts to mortgage rates, he said.

“Over the six weeks since the last OCR call there have not been any big cuts to rates, instead there have been tweaks here and there. That’s because the OCR cuts were mostly front-loaded.

“So we won’t see rates plummet in the way they have between mid 2024 and now. There’s just not the same impetus for banks to make big cuts now.”

McKnight said 1-year rates on average were now sitting about 4.9%, and he thought they might bottom out at about 4.7%.

“We’re not far off that now, but as people roll off higher rates and refix there will be economic stimulus because mortgages are the biggest expense for most homeowners,.”

The benefits of lower mortgage payments would trickle down to the housing market, although very slowly, he said.

“Listings are at a 10-year high, and to see some decent house price increases we need to see those high stock levels come down.”

In ASB’s latest home loan report, ASB senior economist Chris Tennent-Brown said there had been multiple adjustments over the past two years to the popular 1 to 2-year fixed rates.

Fixed rates in these terms were now up to 2.6% below the peaks seen in 2022 to 2023, and that had led to lower rates over the first half of this year, he said.

“Our view is the Reserve Bank may need to ease the OCR a bit more over 2025, but will pause to assess the economic environment and inflation outlook over the coming months.”

That meant the bias for short term mortgage rates was towards them potentially easing slightly lower this year, he said.

“But significant falls for the longest fixed rates are unlikely, especially with some of the recent developments (such as tariffs) pushing inflation expectations higher.

“Fixed terms beyond two years could stay near current levels or potentially increase.”

Tennent-Brown said interest rate markets could change quickly, and that could flow through into mortgage rates.

“Mortgage rates could dip lower than we expect, due to anything from Reserve Bank actions through to renewed threats to the economic outlook.

“However, rates could also hold up longer or increase quicker than we currently expect if inflation does not remain contained in the way we are forecasting.”

Economic conditions suggested to the ASB economic team that mortgage rates would settle in a higher range than the historic lows struck during Covid-19, he said.

For mortgage adviser Hamish Patel, from Mortgages Online, it looked like it was getting near the bottom of the OCR cycle.

Mortgage rates were not likely to go anywhere much, although shorter-term rates might drop a little more with another cut, he said.

“But longer term rates could jump up a bit, although they are not looking bad at the moment.”

Another factor starting to impact on the lending market was the Reserve Bank’s debt-to-income ratios which were now in operation, he said.

“They mean there won’t be any real steam in the market until wages start to go up because lending is all tied to income these days.”