OCR cuts - this year or next?

As the Reserve Bank grapples to get inflation between the 1-3% band, bank economists are split over when the OCR will start dropping.

This week Bloomberg economists said monetary tightening was impacting and cuts could be on the cards in the first quarter of this year as the RBNZ switches from fighting inflation to reviving demand.

However, of the five major banks, the ANZ predicts no rate cuts until February 2025, but cuts earlier cuts to mortgage rates; likewise Westpac; the ASB predicts the first OCR rate in August; the BNZ predicts the OCR will be cut in the third quarter as well as mortgage rates falling and Kiwibank has pushed its OCR rate cut to November along with lower mortgage rates.

The BNZ says the average mortgage rate now is 5.4%. On carded rates, the lowest two year fixed mortgage interest rate is 6.89% - offered by five banks - ANZ, ASB, BNZ, KiwiBank and TSB. The lowest three year fixed rate is 6.75% from ANZ, ASB, KiwiBank, TSB and Westpac.

In his last Property Pulse, BNZ chief economist Mike Jones says this will rise at least another 100bps before the cycle is done, as old fixed terms expire and homeowners roll onto new rates north of 7%.

He says which side prevails in the 2024 interest rate debate will go a long way towards shaping the state of the economy. “The RBNZ’s guidance at November’s OCR review felt a touch strong when it was delivered and even more so now in the wake of the crumbling GDP numbers.

“Our view is that we will see cuts to the cash rate around the third quarter of this year. Market pricing is now even more aggressive, baking in a full 25bps cut from May as part of a move to a 1% lower rate by the end of the year”, Jones says.

“If markets are right, lower retail interest rates from around mid-year will add weight to a second half recovery. By contrast, if RBNZ worries about sticky domestic inflation bear out and the cash rate is held at 5.50% all year, or lifted, the economy will be shuffling sideways into 2025.” Fourth quarter inflation data out 24 Jan will be critical, he says.