Further interest rate falls not on the cards

ANZ economists say the bulk of mortgage interest rates falls has likely ended, barring any major surprises.

Chief economist Sharon Zollner says the focus for many home owners over the coming months will be on when to extend theirmortgage term, knowing that once the RBNZ finishes easing, financial markets will inevitably start to ask when the OCR might rise again as the economy responds to stimulus.

“For those who need to fix today, it’s hard to look past the two-year rate, which is already close to where we see it bottoming out.”

She says if borrowers have the luxury of waiting a little longer, it could make sense to hear what the RBNZ has to say late this month at its next OCR review and Monetary Policy Statement and make a plan after that, as the central bank may signal an appetite for deeper cuts, or even deliver a bigger cut if things deteriorate between now and then.

“In fact, if anything, for some, the decision to fix for longer might now feel tougher, as doing so now means not fixing for a shorter term at a lower rate, intensifying the commonly seen trade-off of cost versus certainty.”

Longer-term mortgage rates have been kept elevated by the lack of downward movement in long-term global rates, which have risen as inflationary fears ripped through US bond markets following US President Donald Trump’s tariff announcements.

“There are obviously a multitude of moving parts but suffice to say that global long- term interest rates have not fallen, and nor have they in New Zealand, despite the lower OCR,” Zollner says.

The bank has the OCR at a low of 2.5% by October.

That has, in turn, seen the ANZ revise down its wholesale interest rate forecasts, and flowing these through its mortgage rate projections means it now sees them falling slightly further. Putting these changes in context Zollner says although one- to two-year rates are expected to fall another 0.4% to 0.2% or so respectively, those falls are small in relation to the 2.3% and 2.0% falls seen respectively since the late-2023 highs.

Looking ahead, she does expect the usual cyclical dynamics that typically play out towards the end of rate-cut cycles to manifest, and that is why the bank’s projections show fixed rate mortgage rates rising into next year.

“We don’t anticipate large rises, but as markets look to the economic response following rate cuts into outright stimulatory territory, we do expect wholesale rates to rise a little.”

Zollner says the bank’s breakeven table show the one year rate in a year’s time the same as it is now, the question the bank’s would ask borrowers is how would they feel if the one-year rate is higher in a year’s time, which it could easily be if OCR cuts do their magic and the economy responds, and markets start anticipating the tightening cycle?

Businesses continue feeling the squeeze

Meanwhile ANZ’s Business Outlook Survey says last month’s global market turmoil led by the US tariff war had a marked effect on New Zealand businesses.

Some of the surveys were completed before the April 3 tariff announcement and a smaller number after.

While the later surveys were subject to more statistical noise and volatility, Zollner says the bank took it as a directional signal rather than taking the numbers as gospel.

“However, the data does support the idea that the turmoil has had a marked negative impact on most forward-looking indicators, and particularly on headline business confidence and businesses’ plans to invest.”

The bank recently revised down its forecast for growth and the OCR, partly because some of the high-frequency data has started to stutter a little, but also because it suspected the uncertainty around the global outlook engendered by the ongoing trade war between China and the US and broader policy moves by the US administration would lead some firms to put their investment and employment plans back on the shelf.
“This month’s survey results suggest that could well be the case. But we’ll have to wait and see whether the impact is short- lived or lasting. That in itself will depend not least on whether trade spats deescalate or worsen from here.”
Business confidence fell nine points to +49 last month, while expected own activity fell just one point to 48.
Most forward-looking activity indicators were sharply lower in the late-month responses.
Pricing and cost indicators indicate margin squeeze from ongoing cost pressures. One-year-ahead inflation expectations were little changed at 2.65%.