Mortgage rates may not drop much despite OCR cut, experts warn

- Experts predict the Reserve Bank will cut the Official Cash Rate by 50 basis points to 4.25%

- Economists warn mortgage rates may not drop significantly despite the OCR cut, as banks have factored it in

- Lower mortgage rates could boost the housing market, but rising unemployment may counteract this effect

Mortgage rates are unlikely to drop that much following next week’s Official Cash Rate decision, experts warn.

The economists OneRoof interviewed ahead of the Reserve Bank’s final meeting of the year all predict the bank will cut the OCR 50 basis points to 4.25%.

But they also believe there won’t be as big a movement in mortgage interest rates as a result of the cut.

Kiwibank chief economist Jarrod Kerr anticipated some changes in the one, two and three-year rates but felt the banks had already factored in a 50-basis-point drop.

“They will all fall, but some of this move has been factored into mortgage rates already because wholesale rates have moved well ahead.”

Mortgage rates had plunged about one percentage point since the OCR was first lowered in August, which was more than the 0.75 points the Reserve Bank had chopped off the OCR during the same period.

Kerr expected the Reserve Bank to be more cautious next year and tipped it would cut the OCR by just 0.3 points at its first meeting of 2025 even though he believes it should reduce the rate by 0.5 points.

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“I think we need that cash rate below 4% ASAP,” he said.

“After two years of recession and inflation, it’s clearly back to where it needs to be. [But] now is not the time for restrictive policy. We need policy back to a more neutral setting.” A more neutral setting would be at or just under 3%, which is where he expected the OCR to bottom out.

CoreLogic chief economist Kelvin Davidson said there had already been some significant cuts to mortgage rates so the next ones might not be as sharp or significant.

“Especially some of those longer-term rates. Your three- or five-year rates might not be far from the bottom.”

Kiwibank chief economist Jarrod Kerr: "We need policy back to a more neutral setting.” Photo / Supplied

Davidson said lower mortgage rates would boost the housing market and people’s finances, but there were also factors playing against it, including the fact that unemployment rates were projected to rise. He estimated property values rising about 5% next year and wasn’t expecting anything “off the charts”.

Davidson was more interested in the Reserve Bank’s Monetary Policy Statement, which was also due to be released on Wednesday. The statement, he said, would give a better indication of where the OCR would go next, including whether there would be further changes and what the size and speed of those falls would be.

“I think the speed of cutting will slow down next year. I think they will give it a bit of a breather and sort of try and judge the impact of what they have already down.”

Infometrics chief forecaster Gareth Kiernan was also of the view that the banks may pull back on the size of their cuts and predicted fixed mortgage rates would bottom out between the very high fours and about 5.4%.

“It just depends on whether financial markets continue to price in further cuts beyond what they are looking at.”

He believed another 0.5-point cut to the OCR was warranted because there was no longer any need to have such restrictive interest rates and also because there was such a big gap until it was next reviewed in February.

“It’s almost making up for the missing meeting in between those times as well,” he told OneRoof.

He agreed the OCR could land at 3.5% by mid-2025.

“Most economists would say 3.5% is probably around about neutral for the OCR so that’s only getting it back to that mid-point and it may well be that the economy needs a little bit more of a kick-start stimulus to aid the recovery in the second half of next year.”

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