Mortgage rates may breach 6% if Reserve Bank goes too far, Infometrics warns

Friday, 17 October 2025

The Reserve Bank is forecasting an era of predictable and subdued interest rates; but not everyone is convinced.

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The Reserve Bank has been impatient waiting for economic growth to show through and has responded with overly dovish cuts to the Official Cash Rate that risk a return to higher inflation and interest rates down the track, economic forecaster Infometrics believes.

Chief forecaster Gareth Kiernan acknowledged the central bank was “walking a fine line between kick-starting the economy’s recovery and overstimulating growth”, but confirmed he felt it was going too far.

Faster-than-expected economic growth over the next 18 months could start to stretch the economy’s capacity and create renewed inflationary pressures by the first half of 2027, he warned in a research note released today.

Although it was not the most likely scenario, it was not out of the question that the OCR would need to rise to 4% by the end of 2027 to bring growth back to a sustainable level, he said.

If that happened, that would likely translate into short-term fixed mortgage rates moving back up to about 6%, he confirmed.

Infometrics chief forecaster Gareth Kiernan is concerned the Reserve Bank is acting too impatiently to cement a return to growth.

The banks are currently offering one-year fixed rates of 4.49%.

Infometrics voiced its concerns amid ongoing uncertainty over whether the economy has yet pulled out of its autumn downturn.

Benefit numbers released by the Ministry of Social Development (MSD) yesterday showed the number of people receiving JobSeeker support climbed to 217,818 as of September 30.

MSD discourages quarterly comparisons on the basis that the figures are not seasonally-adjusted, but the JobSeeker numbers were up by 1809 from June 30, while the number of people receiving a main benefit climbed by 4200 to 410,328.

Infometrics’ warning assumes a solid recovery remains on the cards though.

“We forecast that economic growth will have accelerated to 2.3% per year by early 2027, with per capita growth comfortably above the 1.4% annual average recorded during the 2010s,” Kiernan said.

“We expect households to respond with stronger spending growth in the near term and we also see faster growth in business investment and residential construction in 2027. A new round of monetary policy tightening is likely to be needed from late 2026 to get interest rates back to neutral.”

Many economists expect Stats NZ will report on Monday that annual inflation breached 3% in the three months to the end of September.

But that is expected to be a temporary blip.

Kiernan said it would probably be the second half of next year before it would become clear if the scenario that most concerned Infometrics was likely to unfold.

The Reserve Bank slashed the OCR by 50 basis points to 2.5% in October and raised the prospect of more than one further cut, putting the possibility of a 2% OCR into play.

Its last monetary policy statement in August tipped the OCR moving barely, if at all, between 2026 and 2028.

But Infometrics believes that rate cuts shortly ahead of a return to growth may be putting that outlook at risk.

“There's been a little bit of impatience from them in terms of wanting economic growth to come through a bit more strongly, a bit faster,” Kiernan said.

“There's a little bit of short-sightedness; almost a sense that they want the housing market to pick up and be part of that recovery. We're not so hot on that, on the basis that housing is still relatively unaffordable in our view.”

It had been apparent that the Reserve Bank had not been as forward-looking as it should have been, at times, over the last four or five years, he said. “I'm not convinced that they've improved a great deal in some respects.”