ANALYSIS: New data out last week showed that the annual rate of inflation in the second quarter of this year fell to 3.3%, from 4% in the previous quarter and a post-Covid peak of 7.3% two years ago.
That’s good news for Kiwis who have been squeezed by the cost of living crisis and successive rises in interest rates. The fact that the second quarter inflation results were better than the Reserve Bank had expected will fuel calls for a few quick interest rate cuts.
Anticipation of a cut to the Official Cash Rate is already at elevated levels. Wholesale interest rates – a good proxy for how much it costs banks to lend you money for a mortgage – plunged after the Reserve Bank’s encouraging OCR announcement at the start of the month.
The one-year swap rate has dropped to its lowest point since October 2022, and the major banks are passing on the savings. ANZ cut its one-year fixed rate to 6.85% while Westpac cut its one-year rate to 6.89% – its fourth cut to the one-year rate since February.
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Lower rates are available when you eventually sign on the dotted line, with some mortgage brokers getting 6.72% for their clients. That’s a weekly saving of $52 on a $500,000 mortgage compared to the peak interest rates at the start of the year.
Further rate relief is on the cards, but how quickly will rates tumble?
ANZ’s latest forecasts suggest that the one-year fixed rate could drop to 5.7% by June 2025.
As we’ve seen this week, we don’t need an OCR cut for mortgage interest rates to start coming down. The mere expectation of near-term OCR cuts is enough to start the decline.
However, for ANZ’s forecast to come true, the Reserve Bank will have to start cutting sooner rather than later. There are three more OCR announcements this year, and most economists are picking the last one, on November 27, as the date of the first cut.
Opes Partners resident economist Ed McKnight: "We can’t borrow like it’s 2021, when interest rates had a 'two' or a 'three' in front of them." Photo / Fiona Goodall
The date of the first cut depends on inflation. The reason the Reserve Bank raised interest rates was runaway inflation post-Covid. And while the latest results are close to the Reserve Bank’s target range of 1-3%, the Reserve Bank is concerned about “sticky inflation”.
Last month, the Reserve Bank’s chief economist Paul Conway warned that there were reasons “to think that inflation may be more persistent than in our current projections in the near term. In other words, more ‘sticky’. Most notably, domestic, or non-tradables inflation, and services sector inflation have held up more than initially projected”.
But he also added that there were “also some reasons to think that inflation could fall more quickly than expected over the medium term. For example, increasing spare capacity in product and labour markets could translate into lower inflation more quickly than currently expected”.
Most economists expect headline inflation will return to the Reserve Bank’s target band by September, with third quarter inflation figures, released on October 17, likely to prove crucial.
This is why you can expect the Reserve Bank to be cautious. We can’t borrow like it’s 2021, when interest rates had a “two” or a “three” in front of them. Those days may never come back. But within a year or two, interest rates should have a “five” in front of them and those excruciatingly high interest rates of the last two years could be a distant memory.
- Ed McKnight is the resident economist at property investment company Opes Partners
