Happy New Year! I hope you had a nice Christmas with your family and that you also managed to have a decent break from work.
To start the new year off I thought you would appreciate my opinion on where I see mortgage rates heading now over the next 12 months. This subject has been increasingly raised by the media in recent weeks given that we have seen some small reductions made by the banks to their advertised rates. These reductions have been driven by wholesale rates overseas falling since late last year. The fact that wholesale rates have fallen now is not an indication that mortgage rates in New Zealand are about to become significantly cheaper.
We had the official inflation stats released from Stats NZ last week and while inflation has fallen to 4.7 percent now in the December quarter it’s still too high for the Reserve Bank (RBNZ) and not falling fast enough at this pace to see the official cash rate (OCR) reduced anytime soon. I don’t see much change happening then to mortgage rates unfortunately for the foreseeable future.
To get inflation back down from 4.7 percent to 2 percent could take some time yet. The RBNZ is unlikely to start reducing the OCR early or it runs the very real risk that inflation will take even longer to tame. It’s important to remember the new Government just reminded the Reserve Bank via new legislation introduced late last year that inflation was the bank’s number one priority.
Most people currently taking on a new mortgage are electing to fix for 12 or 18 months now given the degree of uncertainty about how long it will take before inflation is back at a level the RBNZ is comfortable with before it can then start to reduce the OCR. Many people are predicting that this will start happening from August this year but I’m not so sure myself.
There seems to be a lot of “cheerleaders” being interviewed by the media currently who are of the opinion that interest rates will be falling significantly during 2024. Whilst this would be great news for borrowers the reality is that with inflation still sitting well above the RBNZ’s comfort level, we are unlikely to see the OCR reducing in 2024. In my opinion the central bank needs inflation to be back at 2 percent before even contemplating a reduction. Between record immigration, increasing fuel costs and domestic inflation which is proving very sticky the RBNZ knows they have a real battle on their hands.
The Reserve Bank's chief economist Paul Conway told Parliament's finance and expenditure committee (FEC) late last year that net immigration has surprised the RBNZ on the upside “to the tune of tens of thousands,” raising the prospect that interest rates will have to remain high for longer. Paul Conway has again this morning pushed back on market expectations which were betting on the central bank cutting the OCR this year. Again, there remains the very real risk that if the Reserve Bank was to move too soon to reduce the OCR it could then be forced to backpaddle and increase the OCR later this year. No one wants to see this scenario happening, least of all borrowers.
As I mentioned last year historically when interest rates fall, they tend to reduce much more slowly than when they increase. Borrowers need to manage their expectations then as to what they are likely to be paying for their home loan over the next 12-18 months’ time.
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 refinance.
Kind Regards
Simon