Interest rates set to rise

Following the Reserve Bank’s (RBNZ) announcement Wednesday the 27th of May that it was leaving the Official Cash Rate (OCR) unchanged at 2.25%, I thought you’d be interested in knowing what impact I see this having now on mortgage rates.

The minutes of the monetary policy committee (MPC) show governor Anna Breman, chief economist Paul Conway and assistant governor Karen Silk wanted to hold the OCR at 2.25% while the three external MPC members, Carl Hansen, Hayley Gourley and Prasanna Gai, would have preferred to have hiked the OCR to 2.5% Breman used her casting vote to keep the OCR on hold. They all agreed that rates will need to rise and to rise soon.

The RBNZ expects inflation to come in at 4.2% for the June quarter, and to peak at 4.3% in the September quarter, to drop below 3% by the June quarter of 2027 before subsiding back to 2% by the September quarter of 2027. From where I sit our central bank appears to be repeating the same mistakes now of the past which will potentially lead them to having to tighten too much later down the track. Better that we move sooner now so that we then have options and maybe we won’t need to increase the OCR by so much. Perhaps this was what the three external MPC members were thinking on Wednesday when they all voted in favour of increasing the OCR.

The central bank now says it expects the OCR to peak at 3.3% by the December quarter of 2028 and to remain there through to the June quarter of 2029, the end of its forecasting period. I believe the OCR will ultimately go higher than the current RBNZ projections. Odds are that we will see the first OCR increase happening now on the 8th of July this year. My own earlier prediction of the 27th of May was a very close call indeed.

So, what does Wednesday's announcement mean now for mortgage rates? Well, it’s clear that even without an OCR increase fixed mortgage rates are moving upwards. Much of this has been happening out of sight via the banks discretionary rates. We've already seen some longer-term rates moving much higher, back to what experienced borrowers would regard as more “normal levels.” Shorter-term fixed rates will start rising as the Reserve Bank raises the official cash rate to fight inflation meaning that borrowers should expect rate hikes from now on. People should consider a longer mortgage rate if it’s appropriate for their own circumstances. It's clear that we're past the low point for mortgage rates in this current interest rate cycle. There are still some growth threats to the economy, but inflation concerns remain significant as well. The markets had already taken the view that interest rates would have to rise, so this should limit the impact on home loans.

Looking at the housing market now the number of first-home buyers entering the property market without a 20% deposit has hit its highest level since records began, doubling over the past decade. Data from the Reserve Bank shows 47%, or nearly half of first-home buyers did not have a 20% deposit, in the year to March 31st. When records began mid-2014, that figure was just 26%. This trend appears logical with house prices now sitting well below their earlier peaks of the pandemic and low-deposit buyers facing less risk of falling into negative equity. I would however continue to caution borrowers in Wellington against the wisdom of purchasing a property without a full 20% deposit. With the government having signalled that the region’s largest employer is about to shed approx. 9,000 staff the likelihood that property values in the capital city will decrease further is a distinct possibility. Wellington’s housing market is driven primarily by the public service and staff reductions of this level will almost certainly have a negative impact.

Since January 2026, the New Zealand housing market has experienced a period of stabilization with modest, single-digit growth. Nationally, values have edged up slightly but remain highly localized, with some regions recording notable increases and others remaining flat. The national median house price sits at approximately $775,000 and data from the QV House Price Index indicates that average residential values rose by 0.9% over the opening months of the year, bringing the national average to $910,285. While listings have increased giving buyers more choice and longer negotiation windows, overall sales volumes are slowly ticking up. The strongest growth is occurring in the South Island while for Auckland & Wellington prices in the major centres have generally remained subdued or flat. Bank forecasts are predicting modest overall annual house price growth for the remainder of 2026. The RBNZ itself expects rising mortgage rates will dampen house prices.

Please let me know if you would like to discuss the current mortgage rate that you are on with your bank or are needing assistance with finance to purchase a new property or to refinance.

Kind Regards

Simon