Dominick Stephens is predicting a 50bps point cut in the official cash rate this year, probably in June.
He said that would mean floating rates were highly likely to fall and there was a good chance fixed rates would follow.
Cameron Bagrie, ANZ’s chief economist, agreed it was possible that mortgage rates would come down further. The major banks are currently advertising two-year specials as low as 4.49%.
But he said there was too much fixation on what the Reserve Bank was doing, forgetting the other factors that would drive home loan prices.
“At the end of the day, to be able to lend a dollar, banks have got to find a dollar. And it is costing more to attract those dollars.”
He said over the next three to four weeks, deposit rates could change a lot.
“If it becomes more expensive to raise money overseas, it is logical that they will go more aggressive to attract local deposits,” he said.
If that happened, mortgage rates might follow. “But I don’t think the Reserve Bank wants borrowing rates to go up so if they see the funding cost pressure they might need to cut the official cash rate.”
He said he was not expecting an OCR cut but was “on notice”.
Stephens agreed funding pressure could cause a short-term increase in rates but said it was unlikely to last.
“When the penny drops and it becomes more obvious to others than an OCR cut is going to happen, the two-year swap rates will fall and we could see a wider spread between mortgage and swap rates. In the short run [mortgage rates] might pop up a tiny bit higher but they will be lower in six months’ time than they are now.”
ASB is also predicting an OCR cut. Chief economist Nick Tuffley predicts the OCR will stay at 2% until March 2018, lower for longer than the generally-held market view.
Tuffley said the ASB outlook was driven by prediction of ongoing weak inflation.
But he said there were a lot of “moving parts” that would determine how much of the low OCR would filter through to home loan rates.
He said there were potential ripple effects such as the rise in risk premiums in markets in which New Zealand secures foreign funding.
“Right here, right now, it’s hard to know the likelihood of any move. If we do get some pretty substantial moves down in wholesale rates because of the Reserve Bank cutting then we are more likely to get dragged downward in mortgage rates.”
A potential question mark hovered over what the US Federal Reserve decided at its March meeting, he said. The market had price out any chance of an increase in the US cash rate over this year and most of next.
“If there was any Fed increase, because it’s not priced in, it would push US interest rates up sharply, which could have a knock-on effect in New Zealand as well.”
