On 9th October, the Reserve Bank (RBNZ) announced a 0.50% decrease to the Official Cash Rate—a step up from the 0.25% it had predicted back in August—taking us from 5.25% down to 4.75%.
Large parts of the market had been calling for the move in recent weeks, citing the fact that with inflation under control again, there was no good reason to hold off on delivering much-needed interest rate relief.
With the unemployment rate tracking upwards, and many different sectors doing it tough at the moment (including retail, hospitality, construction, and forestry) there’s no doubt that New Zealand’s economy is undeniably weak at the moment.
So, while this latest cut is good news, there’s no quick fix for the problems the economy is facing.
The RBNZ has said that a ‘neutral’ OCR—one which neither restricts nor stimulates the economy—is 3%
Even with rates on the way down again, as long as the OCR is above that level, that will continue to have a tightening effect on the economy.
Given the state of the economy at the moment, the expectation is that the RBNZ is now on a mission to get us back to ‘neutral’ as quickly as possible.
Although the RBNZ hasn’t revised its forecast at this stage, it’s looking increasingly likely that we’ll get another 0.50% decrease as part of our last OCR announcement of the year on 27th November, followed by further big decreases through the first half of next year.
That means we could get back to ‘neutral’ sometime in mid to late 2025.
What does this latest OCR cut mean for mortgage rates?
Off the back of this announcement, we should see one-year fixed rates fall relatively quickly to around 5.50%. We’re already seeing a number of the banks willing to negotiate rates at around that level “under the counter”.
More interesting could be the implications for longer term rates.
If the RBNZ continues on this path—cutting rate aggressively, with a view to getting us back to neutral ASAP—that’s going to see longer-term swap or wholesale rates drop pretty dramatically.
That means there’s now a distinct possibility that we could see three-year fixed rates in market of around 4.95% by Christmas. And that would be a really attractive rate for borrowers.
Right now, we’re seeing the majority of borrowers opt to float or fix short-term (generally for six months) but that will start to shift as some of those longer-term rates come down again.
It’s important for Kiwi to bear in mind that we’re not likely to get the insanely low rates we had during COVID-19 again any time soon
Those were highly unusual times, and people need to be realistic in their expectations of what a ‘good’ rate looks like moving forward.
With a neutral OCR set at 3%, that means we can expect mortgage rates to fall back and settle between 4.5% and 5%. So, as soon as you start to get anything with a 4 in front of it, you’re going to be getting good value for money.
Check in again next week for our latest update on what's happening in the world of interest rates.
