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Home loan borrowers who have been concerned about rising interest rates may find relief in the latest news – financial markets are now anticipating a faster decline in interest rates than previously thought.
Currently, markets are factoring in approximately three interest rate cuts starting from the middle of the next year. Gareth Kiernan, the chief forecaster at Infometrics, noted that this shift in expectations is indicative of a recent “turn in sentiment” regarding the persistence of inflation.
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Kiernan explained, “Markets appear to be leaning towards a quicker global inflation easing than feared, considering the trends in wholesale interest rates observed between May and October.”
According to Chris Tennent-Brown, senior economist at ASB, long-term bond yields and swap rates have significantly decreased in the past month. He added, “Expectations of potential rate hikes by the Reserve Bank have also been scaled back. This trend is mirrored internationally, with global markets increasingly convinced that central banks’ policy rates are reaching their peak.”
Despite these positive indicators, Gareth Kiernan cautioned that mortgage holders might not experience substantial relief until the end of next year, even though the likelihood of interest rate increases has diminished.
Looking ahead, the Reserve Bank is set to update the official cash rate (OCR) next week and release a monetary policy statement, providing insights into the expected rate trajectory. ANZ recently revised its forecast, projecting the OCR to remain at 5.5% until the Reserve Bank feels comfortable making a cut.
While Westpac is the only major bank still anticipating a need for another rate hike, Kiwibank’s chief economist, Jarrod Kerr, stated that the market has fully priced in two 25-basis-point OCR cuts next year, with consideration given to a potential third cut.
Kerr emphasized, “I agree with the pricing. But the Reserve Bank will be cautious. They haven’t fully subdued the inflationary pressures yet. I believe they will want to maintain a vigilant stance until their next Monetary Policy Statement in February. I don’t anticipate significant changes to the OCR trajectory.”
Kiernan noted that the current shift in market expectations hasn’t yet posed challenges for the Reserve Bank, as retail home loan rates continue to rise slightly, contributing to additional tightening for the bank. However, he advised the bank to exercise caution in its communication next week, as any indication of lower interest rates could amplify the recent change in market sentiment, potentially leading to further declines in wholesale rates.
In conclusion, while a slight easing of retail rates may be acceptable to the Reserve Bank, a significant drop in short-term rates could be perceived as a loosening of monetary conditions, warranting careful consideration.
SOURCE: STUFF