The Treasury made the prediction as it published today's Half Year Economic and Fiscal Update. In the report, the Treasury forecasts a "gradual rise" in rates from the 2020/21 year. The prediction falls in line with the Reserve Bank, which in August re-wrote its OCR prediction. The central bank also believes a rise in late 2020 is the most likely scenario.
The Treasury previously predicted the OCR would rise early next year, but has changed its tune in light of recent economic data.
Westpac economists said the Treasury had " fallen into line" with the Reserve Bank.
While economists at BNZ added: "All of this, in turn, entails a tightening phase on the OCR. However, nowhere near as early and obvious as the Budget had. Treasury has today delayed the start of the OCR tightening cycle it (still) sees to H2 2020. And with a lower peak – consistent with an OCR circa 3%, a number of years down the track."
The predictions from the major institutions will be welcome news to homebuyers and advisers, with interest rates poised to stay low for up to two years. The long-term outlook has seen New Zealand's major lenders slash rates to sub-4% levels in recent months, levels not seen for decades.
Finance Minister Grant Robertson's report warned house price inflation has slowed, particularly in Auckland. Household net wealth grew by 4% over the year ending March 2017, down from the 10% average rate enjoyed over the previous two years. The Treasury said lower immigration, alongside regulatory and tax changes, had affected the Auckland market more than other regions.
The report said house price growth could slow if supply expands more rapidly than expected, but "could be stronger than assumed if net migration inflows are higher or income growth is stronger".