Lower mortgage rates not a one way street

ASB has warned mortgage borrowers, interest rate markets are volatile and can change quickly and being aware of the risks is an important part of choosing a mortgage strategy.

Tuesday, December 17th 2024, 9:05AM

by Sally Lindsay

“It’s not a one-way street to lower mortgage rates, Nick Tuffley, ASB chief economist says.

He says the bank’s view is the RBNZ is more than half-way through its easing cycle and economic conditions suggest that mortgage interest rates will settle in a higher range than the recent (and historic) lows struck during Covid-19.

The OCR offshore interest rates and bank funding costs are key influences on mortgage interest rates.

However, different mortgage interest rate terms tend to be impacted to varying degrees by developments both here and abroad.

ASB has highlighted what boosts the outlook for shorter- and longer-term mortgage rates:

Shorter-term mortgage rates (floating or fixed up to about one-year):

A softening labour market, weak demand and squeezed businesses profitability were suggesting OCR cuts were nearing in mid-2024. That caused wholesale interest rates and in turn fixed term mortgage rates to decline prior to the RBNZ reducing the OCR in August, October, and November. The actual cuts helped lower floating and some fixed rates further. We expect the RBNZ to continue to reduce the OCR over 2025.
Bias for short term mortgage rates – easing lower over the first half of next year

Longer-term mortgage rates (fixing beyond one year):

Major global central banks have already started to cut rates and others (like the Reserve Bank of Australia) appear to be getting closer to a turning point, albeit uncertainty is high.
Longer-term NZ mortgage rates have eased over 2024 to reflect this outlook. However, with the five-year fixed rate now below its 20-year average, further falls are unlikely.
Bias for long term mortgage rates – declines over early 2025 focused on the one to two-year terms. The longest terms could stay near current levels or potentially increase.

Tuffley says interest rate certainty, has historically carried a higher rate, but that’s not the case now and the longer terms carry the lowest interest rates.

“Ultimately, it is a trade-off between the cost of the mortgage rate, interest rate certainty for a longer period, vs. the flexibility of the shorter terms and the potential for rates to ease over the years ahead.

“Mortgage rates could dip lower than we expect, due to anything from RBNZ actions through to renewed threats to the economic outlook.”

However, he says rates could also hold up for longer than expected if inflation does not continue to cool as ASB is forecasting.

Impact on the economy

Meanwhile, the impact of lower interest rates on the economy will not kick in for one to two years, Westpac’s economists say in their latest commentary.

While lower interest rates are sparking some more optimism among businesses and households, it will be the second half of next year before there are some robust economic growth figures, but they are on their way.

Using its new GDP Tracker, the bank says after last week’s data, the nowcast for the December quarter stands at +0.1% – a small positive, though still not matching population growth.

It is now more confident the September quarter will mark the end of the economy’s downturn.

The economics team says more recent data has been improving, although there is a clear tug-of-war between the strong rise in forward-looking confidence measures, and the more mixed measures of past activity.

September quarter’s GDP figures will be released on Thursday and the bank says there is more uncertainty than usual around them in terms of both the outcome and the broader interpretation of the data.

The September quarter includes the annual benchmarking exercise, where the quarterly figures are aligned with more detailed (but less timely) annual statistics.

Stats NZ has signaled that this year’s exercise will result in substantial upward revisions to GDP – in the order of 2% additional growth over the past two years.

The revised figures tell a more plausible story about the economy’s recent performance – the declines in per-capita GDP and labour productivity, while still large, have not been as severe as previously thought.

Tags: Mortgage Rates