Could NZ see a return to low COVID rates? Economist weighs in
Another week, another forecast. As global trade tensions escalate, Kiwi mortgage advisers are watching closely to see if economic shocks overseas will put downward pressure on interest rates.
Kiwibank has released its latest outlook, and all scenarios – upside, central and downside – see the OCR going lower, with only a question of how fast and how far.
The backdrop is an intensifying trade conflict between the US and China, which has already rattled financial markets and threatened to derail fragile global growth. For New Zealand, the implications are becoming harder to ignore, with the broader risk being the knock-on effect from weakening demand across Asia and Europe.
Jarrod Kerr (pictured), chief economist at Kiwibank, says that there is now a strong need for stimulatory settings to encourage movement from households and businesses as New Zealand “crawls” out of a recession.
“Before this trade war kicked off, we thought that more rate cuts needed to be done,” Kerr told NZ Adviser.
“If anything, this just exaggerates the need for support through lower interest rates and mortgage rates. That’s much greater today than it was a week and a half ago. We’re in a world with a lot of uncertainty and less growth, and that washes up on our shores.”
Déjà vu: Could a worst-case scenario signal a return to COVID-era rates?
The last time New Zealand faced uncharted waters in 2020, interest rates dropped to historical lows. Kerr says this scenario could be some way away, particularly if US President Donald Trump follows through on his tariffs backtrack. That said, the current environment makes any solid predictions difficult.
“We were in a really unprecedented world [in 2020], and we are entering another world that also looks unprecedented,” Kerr said.
“If things turn really ugly, then the central bank will keep cutting and doing what it takes to get the economy going again. We’re hoping that we’re nowhere near that, but there is a lot of room between where interest rates are now and where they could be in a worst-case scenario.
“We like to say, trust in the process,” he said. “That means cutting interest rates to a point where they take hold and get households and businesses moving again - and eventually, we should see a pickup in the housing market.”
The forecast for May, the rest of 2025
The next OCR decision is due on 28 May. Currently, BNZ is predicting a 25bps cut, while Kiwibank is taking it further and predicting a cut of 100bps to 2.5%.
While falling rates will be welcome news for borrowers, mortgage advisers may need to manage expectations around timing. Kerr cautions that ongoing global volatility, combined with local political uncertainty, was likely to keep some investors and borrowers on the sidelines for now.
That said, Kerr noted that investor sentiment has definitely improved from a year ago - and with some luck, the second half of 2025 should shape up to look more optimistic.
“Investors realise that today is better than where it was last year, and hopefully next year is better than where it is today,” he said.
“But there is not a lot of activity yet, and still a lot of waiting. If everything goes according to plan, we should see a pickup in the second half of the year.
“Now that there’s a threat that these tariffs could last for a while, we’re worried that businesses would simply put things on hold. When that happens and investing and borrowing stops, that kills growth real quick.”
Ultimately, the message is that anyone looking for certainty in today’s environment is going to be disappointed. For mortgage advisers, the next few months are going to be an exercise in “wait and see”.
“These tariffs are shocking the world, so it is a horribly uncertain time – and that’s not good for any financial market or any asset class,” Kerr said.
“There are at least a few months of uncertainty ahead. People don’t want to hear that, but that’s the reality – things are very uncertain, and we just have to play the waiting game to see how things unfold. We’re hoping that things will look much better by the end of the year, and we’ll be tracking into 2026 with a more optimistic feel.”
