Stuck in the slow lane

In the wake of the Reserve Bank’s (RBNZ) higher-for-longer messaging last week, the bank has pushed back the timing of the first OCR cut to February from November and cut its forecast for house price rises this year to 2% from 5%.

The RBNZ’s OCR forecast this week did nothing to indicate cuts were on the horizon and, in fact, the central bank said it had contemplated a lift in the rate.

BNZ chief economist Mike Jones says the deteriorating economic backdrop and slow-but-steady progress on inflation means the bank continues to believe the cash rate can be lowered earlier than RBNZ forecasts imply – now late 2025 – and its best guess is February next year, but significant uncertainty remains.

For some time, the BNZ’s mortgage interest rate view has trod a relatively unexciting middle ground between calls for higher interest rates and speculation of imminent sharp declines.

Jones says in essence, this sideways-to-mildly-lower view of fixed mortgage rates remains. It reflects a combination of:

1. A gradual downtrend in wholesale interest rates. “We suspect wholesale interest rate markets will continue to price in early RBNZ rate cuts, despite this week’s higher-for-longer messaging from the Bank. Particularly if the flow of incoming economic data remains on the softer side.”
2. Rising bank funding costs blunting some of the impact of lower wholesale rates on mortgage rates. Rates on term deposits (the bulk of bank funding) have yet to fall to any significant degree and older, low cost bank funding continues to roll off.

Slow lift off for house prices

Meanwhile, Jones says the bank expects house prices to lift by only 2% for the rest of this year, rising to a 7% increase next year.

He says last year’s short string of monthly house price gains now look like a false start.

“The current scratchy momentum will stick around for longer amid high mortgage rates, a deteriorating economic and labour market, and a jump in unsold inventory.”

He says the bank still expects the house price stasis to give way to a more obvious upswing next year.

“Most important is our view that mortgage rates will start trending lower next year. More demand-friendly housing policies, population pressures, and a stabilising economy will add support. Acting in the other direction, affordability and cash flow constraints will cap the magnitude of any upturn.”