Watch JB's latest OCR analysis below, or keep scrolling to read the full article:
The Reserve Bank (RBNZ) has stuck to its word, cutting the Official Cash Rate (OCR) by a further 0.25% on 9th April, taking it from 3.75% to 3.50%.
We’ve seen a significant drop in wholesale rates over the past few weeks—and while longer-term rates are getting closer to the bottom—I’m expecting to see one-, two- and three-year mortgage rates get to 4.99%.
At this stage I don’t see them going lower than that in the short term.
From here, the expectation is that the RBNZ is going to give us a series of slow but steady 0.25% OCR cuts over the coming months, which should have us back at a ‘neutral’ OCR of around 3% by the middle of the year.
There is some uncertainty around the impact of Trump’s trade tariffs in terms of just how much they’re going to weaken global growth. It’s possible that we could see the OCR drop below the current 'neutral' forecast, to around 2.50% which should see mortgage rates get to the low 4s.
Personally, I’ve been happy to fix for two-years at 4.99%. I have another loan coming up in a few months and will likely fix that one for one-year at what should (hopefully) by then be around 4.79%.
Is there a risk that all the global volatility we're seeing could send New Zealand interest rates climbing again?
In news that will surprise exactly no one, the fallout from Trump’s sweeping ‘Liberation Day’ trade tariffs has resulted in immediate and total chaos—sending share markets and KiwiSaver balances tanking, sparking a raft of retaliatory measures from some US trade partners, and setting America on an almost certain path to recession.
It all feels pretty scary out there, and it’s hard not to get caught up in the drama.
New Zealand won’t escape entirely unscathed, but I can’t see it having much (if any) impact on the future path of interest rates over the coming months. Trade tariffs mean lower growth, and lower growth should mean lower interest rates.
The RBNZ is going to want to avoid a knee-jerk reaction to all this volatility. Instead, I think it’s just going to wait and see how things play out over next little while, letting the dust settle a bit before making any big decisions.
In the meantime, I’m still expecting to see it deliver a series of small but steady 0.25% reductions at each upcoming OCR announcement, to get us back to a ‘neutral’ OCR (of around 3%) by mid-2025.
We’re so close to ‘neutral’ anyway that, in my eyes, it just wouldn’t make any sense to deviate from the plan.
If anything, I think there's a chance we could see interest rates dip slightly lower than previous expected
There’s no question that all these tariffs are going to have an inflationary effect for the US economy—pushing up the cost of living for American consumers—but what we don't know yet is exactly how that's going to play out.
There are two potential paths things could take from here, each of which will have a flow-on effect for the rest of the world:
- If US consumers respond to higher prices by shutting their wallets—i.e. meaning demand falls off a cliff—the Fed will be forced to drop interest rates to help stimulate the economy.
- If instead they respond by demanding pay increases to match the higher cost of living (pay increases that will, in turn, be passed through to even higher prices. And so on and so on…) there’s a risk that the US could get stuck in a wage-cost inflation spiral, forcing the Fed to hold interest rates higher at the same time as the economy tanks. High interest rates + recession = stagflation, and stagflation is nasty. If that eventuates, it would be the worst of both worlds for the USA.
We’re already hearing reports of softening consumer demand in the US—and Trump will want to avoid stagflation at all costs—so scenario one feels like the most likely outcome to me.
If the Fed does drop interest rates, that’s going to make it easier for other Central Banks around the world (including ours) to drop interest rates a little further as well.
The net result of that could see the RBNZ revise its ‘neutral’ OCR estimate downwards slightly—meaning we land somewhere between 2.50% and 2.75% rather than the 3% currently estimated.
Even amongst all the chaos, there’s opportunity for New Zealand
If the US economy does go into recession, other economies will follow.
Given the pain New Zealand has been through over the last few years, we’re pretty well placed to weather the storm.
International trade will slow in response to the tariffs, which means we’re heading into a low-growth environment for the next little while—but there are some potential positives in the mix:
- Compared to other markets, the 10% tariff on NZ-imported goods is relatively light—and that should help us to remain competitive on a global stage.
- We’re really well diversified in terms of our trading partners—i.e. we’re not reliant on the US— and with the Government working to establish a free-trade agreement with India, there’s significant growth potential there too.
- We could also benefit from lower prices on Chinese imported goods, as it seeks to grow other export markets to make up the shortfall left by the US.
So, while the situation's far from ideal, we'll navigate through it.