Central bank will make OCR announcement this week
ASB has released its forecasts on the official cash rate (OCR) and mortgage rates ahead of the Reserve Bank of New Zealand’s (RBNZ) next announcement, quarterly Monetary Policy Statements (MPS), and six-monthly Financial Stability Reports (FSR).
Last year, the RBNZ’s response to the COVID-19 pandemic aimed to push interest rates within the economy significantly lower, including mortgage rates. As a result, rates dropped to their lowest level on record, going back to the 1960s. The central bank also temporarily removed the loan-to-value ratio (LVR) restrictions impacting borrowers and borrowing costs.
With the return of LVR restrictions, a rapidly improving economy, and further adjustments to investor lending restrictions, ASB economists stated in the latest Home Loan Rate Report that they expect the RBNZ to start raising the OCR from its record-low setting of 0.25% in November 2021 – with an OCR peak of 1.5% in late 2023 or early 2024.
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ASB economists’ latest OCR forecast also suggests that mortgage interest rates are likely to “settle” at historically low levels, but slightly higher than the economists’ previous forecasts.
“To be sure, if the situation changes for the worse, then the RBNZ has options to maintain current settings for longer or even lower borrowing costs to support the economy. In addition, fiscal (government) support will continue to provide a lot of stimuli,” the ASB economists wrote in the report.
“Some of the influences on mortgage rates are expected to continue to keep the shorter-term rates low for a few more months. But, with the NZ and global economic outlook having improved, long-term interest rates are moving higher sooner than we were predicting at the early stages of the recovery, and we expect this to continue. When the RBNZ gets closer to actually changing the OCR setting, the upward pressure will come on the shorter terms and floating rates too.”
Based on ASB economists’ expectation that the OCR will peak 1.25% higher than the current levels (1.5%) – in addition to assumptions about bank funding costs and inflation forecasts – ASB economists expect mortgage interest rates to lift to levels around 1% to 3% higher than they are now by 2025.
“Borrowers will be pleased to know we still expect mortgage interest rates to eventually settle over the next decade at levels well below the long-run averages of the past 20 years. And borrowers can lock in incredibly low long-term interest rates (around 3% to 3.7%) now if interest rate certainty over a longer period is of the utmost importance,” the ASB economists wrote on the report.
