Prediction interest rates will remain higher longer

The economic forecaster says consumer spending will continue to be squeezed throughout this year and into next year as households roll off lower fixed mortgage rates and their debt-servicing costs rise.

According to Statistics NZ,  38% of Kiwis have a home loan and RBNZ data show about 90% of mortgage debt is on fixed rates.

Infometrics’ predicts the downward path for interest rates from mid-next year will be much slower than the rate of increases has been.

Chief forecaster Gareth Kiernan says there is little evidence that inflationary pressures have started to moderate, despite New Zealand’s economy probably being in a recession that started in the final quarter of 2022.

New Zealand is under more continued inflation pressure than many other countries, Kiernan says, and there is little evidence that it is starting to ease.

Informetrics latest economic forecasts predict annual inflation will still be 6.6% at the end of the year and 3.8% by the end of next year.

Kiernan says the after-effects of Cyclone Gabrielle are showing through in produce prices, and rents and building costs are also likely to be pushed up in impacted regions.

“Although the Reserve Bank can do little about these immediate pressures, they come at a time when pricing behaviour and inflation expectations have already been sustained at a high level for longer than expected

“Domestic transport costs remain problematic for businesses and upward pressure on labour costs is still significant. We now think it could be mid-2025 before inflation is back within the Reserve Bank’s target band of 1-3% a year.”

One area where the economy is starting to see some relief is in terms of worker shortages, Kiernan says. 

“The government’s immigration Green List and increased processing capacity at Immigration NZ has seen work visa approval numbers soar, and arrivals are following suit.

“This increase in the supply of workers, at the same time as monetary conditions are tightening, will contribute to the unemployment rate reaching 4.3% by the end of this year and almost 5% by mid-2024.”

Following a small 0.1% contraction in annual GDP in the year to March 2024, Infometrics expects growth to average just 0.8% a year during 2024 and 2025.

“Even with infrastructure repairs following Cyclone Gabrielle providing a limited boost to growth, sluggish exports and household spending will weigh on the economy for several quarters,” Kiernan says.

“But unlike some other forecasters, we do not believe the Reserve Bank is overdoing the slowdown. Insipid growth is needed to correct the imbalances that have manifested themselves across a wide range of indicators, from the housing market, to the current account deficit, and inflation outcomes.”

Interest rates up and down

Meanwhile Westpac has joined the country’s biggest mortgage lender ANZ in making changes to lending and deposit interest rates.

The bank is cutting the interest rates on its 3-year, 4-year and 5-year fixed-term home loans by up to 60bps. It is offering ‘special’ rates for eligible customers across each of those terms at 5.99%.

Shorter term home loan fixed interest rates are increasing by 5bps to 30bps.

Interest rates on term deposits spanning 30 days to 18 months are increasing, while interest rates on term deposits of three years are decreasing.

The bank says the competitive rates are a helpful way for customers to gain certainty about their repayments, which is important in a period where the outlook on interest rates is unclear.