Will rate cuts be the story of 2025?
The Reserve Bank of New Zealand's (RBNZ) decision to hold the official cash rate (OCR) at 5.5% was widely expected, but the industry is divided on the implications for mortgage holders and the property market.
With inflation proving sticky at 4% and well above the central bank’s target band, RBNZ delivered its most hawkish stance of the year as it hopes to curb domestic inflation.
Reacting to the news, the Finance and Mortgage Advisers Association (FAMNZ) welcomed the RBNZ's decision to maintain the current rate but stressed the need for a future reduction.
“New Zealanders have endured significant rate rises and cost-of-living increases, and they need a break,” said Peter White AM (pictured above left), managing director of FAMNZ.
“Mortgage advisers have been working with many homeowners who have been forced to refinance their loans and look for a better deal in order to cope with higher repayments, particularly those coming off fixed interest rates.”
“Unfortunately, some have been unable to refinance and will benefit from a lower rate in the future.”
With cash rates generally trending towards cuts globally, Ray White chief economist Nerida Conisbee (pictured above centre left) understood the reasoning if the RBNZ had decided to cut the rate.
“New Zealand is in recession and a rate cut would boost the economy; however, the RBNZ has decided to remain cautious at this point,” Conisbee said.
While a rate cut would have been welcomed by many businesses and consumers, Conisbee said it was not all bad news.
“The rate of inflation in the March quarter was the smallest since June 2021. The rate of inflation is heading in the right direction,” Conisbee said.
According to the figures, the RBNZ considers that New Zealand has emerged from technical recession, but also that GDP growth will remain muted in 2024-25, with employment set to stagnate and unemployment likely to rise.
“Rates will be cut, almost certainly within the next 12 months,” Conisbee said.
Will rate cuts be the story of 2025?
However, not all are still optimistic about a 2024 rate cut.
The most important question on the market’s mind about the Reserve Bank's latest statement was whether their expectations change about how long it will take for inflation to fall back down to their target of 2%? This was especially relevant considering the recent inflation data for the first quarter.
The answer, according to ASB Bank chief economist Nick Tuffley (pictured above centre right), was that the central bank is “noticeably more concerned than previously, and more concerned than we thought would be evident in this release”.
“The RBNZ’s forecasts have inflation holding up higher for longer, with inflation not back to 2% until 2026 - though it is a rounding error from that mark over the second half of 2025,” Tuffley said.
Consequently, the RBNZ forecasted the need to hold the OCR higher for slightly longer, with cuts not implied until around August 2025 – about three months later than in the February forecasts.
The Reserve Bank even considered raising interest rates at this meeting. However, they ultimately decided against it because inflation, although decreasing very slowly, is still headed in the right direction.
“The clear conclusion, though, was that interest rates need to hold up for longer – as the forecasts showed,” Tuffley said. “For markets, the message was that OCR cuts are very unlikely this year.
“Market pricing had recently been pricing in around 40bp of cuts by year-end.”
While Tuffley said there is some theoretical chance the RBNZ could cut the OCR in November if inflation pressures suddenly ease more dramatically than anticipated, it “looks like an extreme tail risk at this point”.
“Market pricing has moderated, but still implies a 25bp cut by year-end,” he said.
What else influences mortgage rates?
It’s worth noting that the OCR isn’t the only influence on mortgage rates; factors such as bank competition and offshore financing rates also play an important role.
But in an environment where OCR cuts appear even more likely now to be a story for 2025 than 2024, CoreLogic NZ chief property economist, Kelvin Davidson (pictured above far right) said something similar seems a sensible assumption for mortgage rates too.
“As such, conditions look set to remain testing for at least six to nine months for new borrowers, as well as those existing mortgage holders who still need to fully reprice up to current market rates,” Davidson said.
“Sales volumes and property values could also remain fairly soft, and even if mortgage rates do start to fall more appreciably in 2025, that’s when the limiting influence of (likely) debt to income restrictions would start to kick in.”
All in all, Davidson said this remains the year of the underwhelming upturn for the property market, and with some job cuts now showing through, downside risks to house prices have certainly not disappeared altogether – especially with buyers having plenty of choice amongst the elevated levels of listings on the market.
