When will NZ interest rates drop? Our prediction

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The average fixed interest rate now sits at 7.03% — the highest in fifteen years. And the million-dollar question that every Kiwi is asking — when will they start going down? 32% of New Zealand households have a mortgage on their primary residence. With more hoping to get on the property ladder, even small changes to interest rates are a big deal. We sat down with the Head of Mortgages at Global Finance, Aseem Agarwal, to get his expert opinion on when they’re likely to drop.

Aseem and his colleagues predict the decline will begin in next year’s first or second quarter — around March or April. But how fast it will drop will depend on a few things:

The depth of the recession

With a slowing global economy, reduced residential building activity and the effects of new monetary policies, New Zealand’s economic growth started to slow at the beginning of this year. Aseem says it’s anyone’s guess how long and deep this will go, but there is one silver lining.

“When governments want to encourage spending and boost inflation to target levels, one tactic is to push interest rates down.”

Aseem expects the rates to peak by June or July this year, but they will probably hold there for another six months.
“Because the economy tends to go stale before the elections, nothing will change until the start of 2024.”

How quickly inflation gets under control

Inflation levels were slightly lower than expected in the last quarter. Stats NZ showed that they had increased by 6.7% in the last year (economists predicted around 7%). And that’s following a 7.1% increase the year before. Despite this good news, Nicola Growden, Senior Manager for Stats NZ consumer prices, notes that “inflation is still at levels not seen since the 1990s.”

To help combat this inflation, on April 5th, the Monetary Policy Committee increased the Official Cash Rate (OCR) by another 50 points. The higher OCR leads to increased interest rates, less borrowing and more saving. And when people spend less, demand decreases, and there’s less pressure for prices to rise. Aseem says we’re now waiting for the OCR to do its job.

“When inflation returns to 1-3% (the target for the Reserve Bank), the OCR should return to normal levels, and interest rates will start to decline.”

If the banks’ cost-of-borrowing changes

The interest rates that banks pay for funds from other financial institutions or markets play a big role in the interest rates they charge customers. And it’s not just our domestic OCR that has been pushed up – other international lending rates have also risen to help slow their respective economies. Aseem says the benefit could slowly trickle down to us when international lenders bring out better rates.

Aseem’s crystal ball

Only time will tell how interest rates will change in the future. However, it always helps to monitor and analyse the economy and policy decisions in real-time, so you can make better investment decisions and plan for potential changes in interest rates. Armed with Global Finance’s latest market analysis and long-term experience, Aseem feels there’s a significant change on the horizon for New Zealand interest rates.
“We predict that there will be a drop of 0.25 – 0.35 % every quarter starting next year. And by the end of next year, we expect the rate to be around the high 5s or early 6’s. The following year by end of 2025, it might be sitting at around 5%.”

Want to learn more about managing a higher interest rate? Speak to the team at Global Finance today.

The information and articles published are true and accurate to the best of the Global Finance Services Ltd knowledge. The information given in this article should not be substituted for personalised financial advice. Financial advice should always be sought independently which is personalised depending upon your needs , goals, and circumstances. No person or persons who rely directly or indirectly upon information contained in this article may hold Global Financial Services Ltd or its employees liable.