RBNZ warns interest rates unlikely to return to pre-covid levels
Reserve Bank chief economist Paul Conway has added his voice to those warning that interest rates, and therefore mortgage rates, aren't likely to return to pre-covid levels.
Thursday, January 30th 2025, 9:03AM
by Jenny Ruth
Reserve Bank chief economist Paul Conway has added his voice to those warning that interest rates, and therefore mortgage rates, aren't likely to return to pre-covid levels.
That's because the neutral level of the official cash rate (OCR), the point at which it neither stimulates nor constrains the economy, has risen a little following the pandemic and Conway attributes that to weak productivity growth and the aging population.
He estimates the neutral OCR level lies somewhere between 2.5% and 3.5%.
“Without future shocks, the neutral interest rate indicates where the OCR is likely to settle to keep inflation at the 2% target midpoint,” Conway said in an online speech.
Currently, with the OCR at 4.25%, two-year mortgage rates range from 5.29% to 5.49% whereas before the pandemic, when the OCR stood at 15, they were hovering below 4%.
Most economists are expecting the RBNZ will lower the OCR to 3.75% when its monetary policy committee next meets on Feb 19.
Conway said the NZ is “a capital-shallow economy” and that combined with low productivity limits the ability of the economy to grow.
“Unlocking higher investment and productivity growth is key to raising potential output growth and improving per capita incomes. This would also reduce the likelihood of negative recessionary economic growth during future periods of restrictive monetary policy.”
NZ has effectively been in recession on a per-capita basis since the September quarter of 2022 and the latest data showed GDP fell 1.0% in the September quarter of 2024, making it the worst recession since 1991.
In per capita terms, GDP fell 1.2% in the September quarter and was down 2.1% in the year ended September.
Commenting on Conway's speech, Westpac chief economist Kelly Eckhold suggested Conway was being a little optimistic about the neutral OCR level. 
“We continue to see the RBNZ’s assessment of the neutral OCR as too low. We see 3.75% as closer to reality which lies outside the top end of the RBNZ’s assessed range,” Eckhold said.
“The yield curve looks to be more consistent with the neutral rate being closer to 4% than 3%. Time will tell on this.”
Conway said that as the OCR gets closer to neutral, “we will need to feel our way,” and RBNZ will be continually cross checking its estimate of neutral against what it sees in the real economy.
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