Rates, inflation, and housing shifts
Interest rates are steadily declining, with the RBNZ’s OCR expected to drop further, leaving room for additional decreases in short-term mortgage rates despite retail rates already factoring in some cuts, according to BNZ’s Mike Jones.
Economic outlook: Recovery will take time
Economic indicators show stabilisation, but rapid growth remains unlikely.
“It’s like trying to start a lawnmower that’s been on ice all winter,” said Jones, BNZ’s chief economist.
Although manufacturing and service sectors have improved from mid-year lows, both remain in contraction.
A weakening labour market further complicates the recovery, with fewer job ads and growing signs of spare capacity across the economy.
Inflation falls within target range
However, Jones warns that inflation has left consumer prices at higher levels despite the slowdown. Forecasts suggest inflation will remain within the 1.5-2.0% range by late 2025.
“Whichever way we slice and dice the numbers, we get the same broad conclusion: inflation is well and truly beaten, and likely to stay that way in the short-term,” he said.
Housing market: Slow, patchy recovery
Despite recent optimism, the housing market continues to “shuffle sideways.”
While mortgage rate cuts are lifting sentiment, house sales remain below average levels, and oversupply is slowing price recovery.
Recent data showed national house prices down 0.6% so far this year, though regional trends vary. South Island markets, like Otago, have seen moderate growth, contrasting with sluggish performance in Auckland and Wellington.
OCR cuts ahead: A return to neutral rates
RBNZ’s current OCR of 4.75% is still considered restrictive.
Jones expects further rate cuts, forecasting a drop to 2.75% by late 2025. Markets have already priced in the likelihood of a 50-basis point cut in November, with the possibility of an even larger 75-basis point cut under discussion.
“The case to keep pushing it down rapidly is thus clear,” Jones said.
Retail rates have already fallen, with mortgage and term deposit rates dropping by 80-120 basis points since July.
Shifts in borrowing behaviour
Borrowers continue to favour shorter mortgage terms, with 86% of new lending in August set for terms of 12 months or less.
This trend reflects expectations of future rate cuts, though longer-term rates may regain popularity later this year as the market stabilises.
The current mortgage curve indicates that shorter-term rates still have more room to fall, signaling potential relief for homeowners as we move into 2025, BNZ reported.
Read the BNZ blog for the full report.
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