New Zealand’s Interest Rate Outlook: Economists Predict Further Cuts

The Reserve Bank of New Zealand (RBNZ) has announced no change to the official cash rate for now, but economists are predicting further cuts in the near future. In this article, we’ll delve into the latest forecasts and expectations from top economic institutions.

Economists Unite on 50-Basis Point Cut

New Zealand will not get another official cash rate update until February, but economists agree that it is likely to be another 50 basis point cut when it happens. ASB has changed its forecast to a 50bp cut in February, instead of the 25bp it previously forecast.

“The Reserve Bank’s public comments… indicate that [it] sees a 50bp cut in February as more of a base case. We take these comments at face value, though stress that the size of the next cut will still depend on how events unfold over an action-packed three months ahead of the February decision.”

ASB’s economists said beyond February, it expected two 25bp cuts in April and May, to take the rate to a trough of 3.25 percent.

Other Institutions Back the 50-Bp Cut

ANZ economists also predict a 50bp cut in February as their baseline expectation. They added that one would have to have markedly different near-term forecasts from the RBNZ to not also have a 50bp cut as the default expectation at this point.

Kiwibank has lifted its forecast for the bottom of the cycle to an OCR of 3 percent, rather than 2.5 percent previously. Infometrics economists said a 50bps cut was the most likely outcome in February but based on the economic projections from the Reserve Bank, a 25bp cut would be more appropriate.

Why Borrowers are Choosing to Fix

Although the economists were united in their forecast of another big OCR cut in February, David Cunningham, chief executive of mortgage advice firm Squirrel, said borrowers were still choosing to fix, even for a short time, rather than float their home loans. The gap between floating and fixing rates is around 7.4 percent compared to a six-month fix of about 6 percent to 6.2 percent.

Infometrics principal economist Brad Olsen said given how large the gap between floating and fixing was, it probably did not make sense to float. “It might have made sense when you had a week or two until the next review but three months is a long time.”

Conclusion

In conclusion, economists are predicting another 50 basis point cut in February, with most institutions backing this forecast. Borrowers are still choosing to fix their home loans despite the expected interest rate cuts, likely due to the significant gap between floating and fixing rates. As the economy responds to monetary easing, it remains to be seen how low the OCR will go, but one thing is certain – New Zealand’s interest rate outlook is set to continue its downward trajectory in the near future.