Long-term interest rates not expected to fall much further

ASB says further OCR cuts will have minimal impact on longer-term rates.

While longer-term mortgage interest rates are likely to drop further, the rate of decline is expected to slow as the OCR reaches the RBNZ’s neutral rate of 3% by the end of the year. 

This is reflected in the bank’s latest quarterly housing confidence survey which shows the number of people expecting lower interest rates has dropped from a record high of 57% to 51%.

Expectations for dropping interest rates varied across the regions, with the sharpest fall in the North Island, excluding Auckland, from 56% to 48%.

South Islanders, excluding Canterbury, are more confident with 52%, up from 49% in the third quarter of last year, expecting interest rates to fall further.
Cantabrians replaced Aucklanders as the most optimistic about a decline in interest rates.

ASB economist Yen Nguyen says the medium-term outlook for mortgage rates is now not as straightforward as in the previous quarter.

For example, the impact of external influences on New Zealand interest rates is uncertain, though initial reactions to Donald Trump’s re-election pushed longer-term wholesale rates higher.

“The OCR could conceivably level out above or below the neutral level – 3.25% in ASB’s view – depending on how sticky inflation is.

In the coming surveys, we expect softer expectations for lower interest rates in 12 months’ time, reflecting concerns about a resurgence of inflation due to external influences.”

CoreLogic chief property economist Kelvin Davidson says mortgage interest rates drops will be a bit slower or smaller than those recently seen - especially since banks were already cutting in advance of the OCR drop to 3.75% last week.

Although interest rates have come down 1.75% since the RBNZ started cutting last year, they remain at levels that restrain demand, Jarrod Kerr, Kiwibank chief economist says. 

“The OCR could conceivably level out above or below the neutral level – 3.25% in ASB’s view – depending on how sticky inflation is.

“After a severe recession, it's hard to justify. We have rising unemployment and inflation rangebound near target. Job done. Release the brake and put it in neutral.  If anything, the RBNZ may need to stimulate, by putting the economy in drive, tapping the accelerator, and cutting below 3%.”

Kerr says the good news is that the rate cuts are feeding through to the economy fast, with 81% of mortgages fixed for less than a year.  

“That points to a firmer recovery in the second half of this year.”

ANZ and Westpac think it will soon cost them more to borrow money and the swap rates won’t come down much more.

Although the RBNZ has indicated it will keep cutting the OCR, the banks say the market has already priced in future cuts and there won’t be much room to move on lowering longer-term mortgage interest rates. 

Meanwhile in ASB’s survey Kiwis’ expectations for house prices were positive for the sixth consecutive quarter. Confidence in house price gains has continued to improve, although it remains lower than the levels at the start of last year, with 33% expecting increases, compared to 44% in the first quarter of 2024.