Interest rates forecast: Have they peaked or is more pain on the cards?

There’s been no change to the Official Cash Rate since May, and there’s little chance it will change when the Reserve Bank meets for the final time this year on November 29.

But economists are divided on whether the OCR will still sit at 5.5% when the bank regroups next year on February 28, with some thinking the cash rate could go higher.

Even those who believe the OCR has peaked say bank mortgage interest rates could still rise, piling further pressure on homeowners.

That’s because much of the money banks lend is sourced from wholesale borrowing offshore and from money deposited with the banks, neither of which is affected directly by the OCR.

Kiwibank’s chief economist Jarrod Kerr told OneRoof: “We've seen wholesale rates around the world rise quite sharply and we’ve seen quite high competition for term deposits.”

Kerr said the Reserve Bank was unlikely to raise the OCR in 2024. Mike Jones, chief economist at BNZ, agreed but economists at Westpac and ANZ think there is a chance the Reserve Bank will put up the cash rate to keep a lid on inflation.

Kerr said around 30% of mortgage-holders were due to roll onto higher rates, and they faced financial pain whether or not mortgage rates went up again.

“About 30% roll off in the next few months. Two years ago, we had quite a competitive mortgage rate. There was a battle in the two-year space [and] those two-year rates are rolling off now from sub-3%.”

Standard two-year rates are now well over 7%, with Kiwibank’s at 8.05% at the time of writing. Floating can go as high as 9.44%.

Writing in Westpac’s NZ first impressions newsletter, economist Darren Gibbs said there was value in fixing mortgage rates for up to three years, with interest rate cuts some time away. “Shorter terms could be more expensive.”

BNZ’s Jones said the Reserve Bank’s actions so far had brought down inflation (now at 5.6%, but still outside the 1-3% band). “Although there's still a way to go, we’ve seen some good progress on some inflation indicators. We think we’ll see continued easing such that the bank doesn’t have to raise interest rates.”

Kiwibank chief economist Jarrod Kerr: "Two years ago, we had quite a competitive mortgage rate." Photo / Fiona Goodall

Jones said food prices had fallen slightly, construction costs had flattened off and the supply chain had improved, all of which had taken some of the steam out of inflation.

Higher wholesale rates from overseas, which have put pressure on mortgage interest rates in New Zealand, were also helping keep a lid on inflation.

Jones believes mortgage interest rates should start falling from May 2024, although it could be later. “We admit that that’s about the earliest you might expect a rate cut. It could be a little later in the year,” he said.

In their monthly Property Focus, ANZ’s economists noted that fixed mortgage rates were slightly higher across the board in October, although the changes were minimal. “It continues the trend of mortgage rates rising even with no changes to the OCR,” the economists wrote.

“Since May, the average mortgage rate paid by owner-occupiers and property investors on new lending, including those rolling over fixed terms, has risen by about 20bp.

“The main driver has been the sharp rise in global interest rates, which have dragged NZ swap rates, a key determinant of mortgage rates, with them. Recent local activity data has remained resilient, and although Q3 CPI wasn’t as strong as we expected and saw us push out the timing of the next OCR hike in our forecast from November to February, we still expect a hike.

“That’s predicated on our view that while inflation is falling, it’s not falling quickly enough. Borrowers still face an inverted mortgage curve, and that makes for a tough decision: fix for longer at what might be near the top of the cycle; or fix for shorter at a higher rate. It’s hard to say that one is clearly better than the other, but break-evens still fall more rapidly than our forecasts, hinting that fixing for longer may end up being cheaper in the long run.”

Use the search field to find out the best mortgage deals available today.