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The Reserve Bank of New Zealand (RBNZ) is widely expected to reduce the Official Cash Rate (OCR) by 50 basis points this week. While this would mark a significant move, experts caution borrowers against expecting drastic reductions in retail mortgage rates. Here’s a detailed look at what this means for homeowners and prospective buyers.
Key Expectations:
- Final OCR Update for 2024: This will be the last OCR decision of the year. Most economists predict a 50-basis-point cut, with future adjustments likely moving to smaller 25-point reductions starting in February 2025.
- Long-Term Projections: Analysts foresee the OCR eventually dropping to around 3%, potentially bringing retail mortgage rates into the 5%–5.5% range.
Countdown to New Zealand’s Final OCR Announcement of 2024: What Borrowers Need to Know
Limited Impact on Fixed Rates
Gareth Kiernan, Chief Forecaster at Infometrics, explains that the market has already factored in a 50-basis-point cut. Therefore, fixed mortgage rate reductions might be modest, likely around 10 basis points. Floating rates, however, tend to mirror the OCR directly and could see a full 50-point drop.
Kiernan noted that if the RBNZ were to surprise the market with a 75-basis-point cut, the impact would depend on market perceptions. If viewed as accelerating future cuts or signaling deeper reductions ahead, fixed rates could decrease by an additional 10 to 40 basis points.
Wholesale Rates: A Complicating Factor
A significant factor impacting mortgage rates is the recent rise in wholesale swap rates for terms over two years. This increase, driven by both global and domestic factors, has added upward pressure on long-term mortgage rates.
Key drivers include:
- Global Influences: The re-election of Donald Trump has raised concerns about inflationary fiscal policies in the United States.
- Local Trends: Early signs of economic recovery in New Zealand are also influencing market sentiment.
Kiernan suggests that unless wholesale rates reverse their upward trend, any OCR cuts might have a limited impact on reducing longer-term mortgage rates.
Additional Expert Insights
Kim Mundy, Senior Economist at ASB, echoes this view, emphasizing the complex factors influencing retail mortgage rates beyond the OCR alone. She expects continued OCR cuts in 2025, though at a slower pace, which may gradually influence home loan rates.
Jeremy Andrews, a mortgage adviser at Key Mortgages, highlights ongoing volatility in the market. While some banks have reduced six-month rates to around 5.99%, others have pulled back discounts. This variability indicates uncertainty about global economic growth, inflation, and geopolitical risks.
What Borrowers Should Do
- Act Strategically: If you’re considering fixing your mortgage, it may be wise to lock in a shorter-term rate now rather than waiting for deeper cuts.
- Monitor the Market: With multiple factors influencing rates, staying informed about both local and global economic trends is essential for making the best financial decisions.