Interest rate cuts are on the cards for late 2024, say most economists despite Reserve Bank rhetoric.
Economists believe the Reserve Bank of New Zealand could still pivot the cash rate from as early as August 2024 with most tipping mortgage interest rates reducing towards the end of 2024, but caution is advised as the Reserve Bank runs out of patience controlling inflationary pressure.
While the Reserve Bank left the OCR on hold at 5.5% on November 29, and its future track suggests no cuts until the middle of 2025, as it pushes back against market exuberance, economists were still predicting a subdued upturn for New Zealand homeowners in 2024.
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BNZ chief economist Mike Jones was picking August 2024 as the turning point for the OCR with mortgage interest rates to start trending downwards in the last quarter of 2024. His view on mortgage interest rates was supported by economists at Westpac, Kiwibank, ANZ and ASB who were also predicting longer-term mortgage interest rate cuts in late 2024. Westpac is the only bank expecting further hikes to the OCR in 2024, in line with the Reserve Bank forecast.
Jones said BNZ had pushed its view on OCR cuts out from May 2024 to August 2024, but all evidence was still suggesting inflation was falling in the right direction.
“There is always potential for shocks but we’re seeing interest rates are high around the world and the higher chance is that the shock will be on the downside,” said Jones.
BNZ’s November Property Pulse has floating rates sticking where they are for some time yet. The report said mortgage rates were broadly peaking but they didn’t expect to see fixed rates trend lower on a sustained basis until late next year.
“When the downtrend does come, we’d expect short-term rates to fall the fastest ... longer term fixed rates already factoring in a good chunk of the cutting cycle ...”
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Nick Tuffley, ASB’s chief economist, expected mortgage interest rate cuts to arrive by the end of 2024 with OCR cuts in February 2025.
“I think the potential for any earlier cuts has been shot away with the recent announcement. We will see long-term mortgage interest rates come down before OCR cuts as the markets price in expected OCR reductions,” said Tuffley.
He said there was still about 20% of mortgage holders at or below 3% interest rates and some of them had fixed for up to five years in 2021, avoiding the pain of interest rate rises so far.
“People who fixed for three, four and five years in 2021 will continue getting good rates to mid-2024 and through to 2025 avoiding much of the period of high interest rates,” said Tuffley.
BNZ chief economist Mike Jones: “There is always potential for shocks." Photo / Fiona Goodall
Kiwibank chief economist Jarrod Kerr said the Reserve Bank was running out of patience getting inflation under control and had given the market a stern warning.
“We don’t think it’s needed but any thoughts of rate cuts have certainly been postponed with the Reserve Bank hell bent on getting inflation back to the 2% mark.”
He was now picking OCR cuts around November 2024 and long-term mortgage interest rates to start coming down a little earlier.
“The surge in migration has been larger than anyone thought and it’s already putting pressure on rents and prices. We don’t see interest rates going up further but that is the threat if inflation can’t be brought under control.”
EasyStreet Mortgages financial advisor Gareth Veale believed interest rate cuts would be 12 to 18 months away but could be as soon as the middle of next year.
“I think the Reserve Bank is being tough on the rhetoric to dampen the pressures that are building inflation.”
With indicators like spending on Black Friday, which was well down, the fact most people have moved off low interest rates to higher interest rates and signals internationally all pointed towards rate cut, he said.
High interest rates have been a restraint on house price growth. Photo / Fiona Goodall
ANZ economist Andre Castaing and Westpac chief economist Kelly Eckhold were more conservative suggesting no OCR cuts until 2025, although Castaing expected mortgage interest rates to fall towards the end of 2024.
“We’re picking that while there won’t be further OCR cuts until 2025, mortgage rates will fall prior to that based on the current one- and two-year market pricing as wholesale traders expect the OCR to fall,” said Castaing.
“New Zealand rates will be heavily influenced by the global interest rate market which have been pricing several US interest rate cuts in the second half of next year.
“The Reserve Bank wants to cool the economy and house prices and one of the main drivers of economic activity in New Zealand is house prices. The Reserve Bank has to keep them in check.”
While interest rates would reduce it was unlikely, if ever, we would see the record low rates reached in 2021. Castaing believed they may eventually bottom out at a more realistic level of 4 to 5.5% where the economy was neutral, and the Reserve Bank was happy with inflation.
Westpac chief economist Kelly Eckhold: "We would have to see a run of very weak data for the Reserve Bank to get back into cut mode.” Photo / Fiona Goodall
Westpac’s Eckhold anticipated OCR cuts at the start of 2025 saying forecasts were in line with the story around surging migration and the Reserve Bank adjusting its house price forecast accordingly to 5.5%.
“It’s still lower than what we’re forecasting for house prices at 8% growth next year, but we’ve come a long way from the 1% they were forecasting,” said Eckhold.
He said data over the next few months including migration and housing market indicators and the next couple of CPI results would be key.
He said there was no forecasting to determine how long the increased migration cycle would continue and while the annual total may fall it could persist for some time.
“Covid saw people put their lives on hold for three years and we are one year out of it now so it could continue for a while.”
“I think the market still has an idea that there will be rate cuts in the second half of next year, but I would suggest the conviction on that is not very high. We would have to see a run of very weak data for the Reserve Bank to get back into cut mode.”
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