Senior economist Satish Ranchhod says Westpac doubts the central bank intended to materially tighten financial conditions after dropping the OCR to 2.25% and indicating further cuts are unlikely.
Financial markets responded to the RBNZ’s message and pushed up short-term rates. That signals upward pressure on borrowing rates in both mortgage and wholesale markets, he says.
“The RBNZ could comment explicitly it didn’t intend to tighten conditions, which could assuage concerns in wholesale markets that a normalisation of the OCR might be coming sooner than previously expected.
“This may also help to cap wholesale rates and ease the tightening in financial conditions,” Ranchhod says.
With the RBNZ signalling the hurdle for further rate cuts his high, market pricing has swung around sharply.
At the beginning of the week only three basis points (bps) of easing was priced in over the coming months.
Looking further ahead, a hike in the OCR to 2.50% is fully priced in by the end of next year, with several further increases expected over 2027.
Since the RBNZ meeting at the end of last month, benchmark wholesale interest rate swap rates have increased by 15-30 basis points, with longer maturity rates rising by more than shorter maturities.
That rise in wholesale borrowing costs has implications for retail mortgage rates, Ranchhod says. “Typically banks pitch retail mortgage rates at a margin above their funding costs. And wholesale swap rates are a key component of those funding costs.”
He says this means that as wholesale rates rise, the likelihood of retail interest rates increasing (including mortgage rates) also rises.
“It’s also notable that the margin between retail rates and wholesale rates is as narrow as we have seen since the start of last year. And margins are a lot narrower than the average seen since 2010.”
Margins were a lot lower during the Covid period in 2021- 2023. However, that was likely due to the concessionary financing offered by the RBNZ as part of its Covid response, which temporarily reduced bank funding costs and allowed narrower funding spreads, Ranchhod says.
“This suggests it is longer-term mortgage rates that might be under the most pressure to rise. This makes sense given it has been longer-term wholesale rates that have reacted the most to the RBNZ’s less dovish stance.”
Pressure on borrowing costs
The outlook for interest rates remains cloudy, Westpac says.
The pressure on borrowing costs is notable given the increasing numbers of fixed rate mortgages that are now coming up for repricing.
“We’ve already seen about 40% of mortgages coming up for refixing over the past six months, and a further 32% will be rolling over in the next six months,” Ranchhod says.
That’s important, as even though the RBNZ’s cutting cycle has likely come to an end, when borrowers go to refix their mortgages, many will be rolling on to much lower rates.
For instance, over the past year the one-year mortgage rate has fallen by nearly 130bps, while the two-year rate is around 250bps lower than in 2023.
Accounting for when borrowers fixed their mortgages (rather than the rates currently on offer), the average ‘effective’ mortgage rate that borrowers are actually paying has already fallen from 6.39% in October last year to 5.36% in September 2025 (down 103bps).
“We expect further falls over the months ahead,” he says.
The drop in mortgage costs has been slowly feeding through to a lift in household disposable incomes, and Westpac is starting to see early signs that this is boosting spending appetites.
There was a sizeable lift in spending on Westpac-issued cards over November, including a lift in discretionary spending areas like furnishings and apparel.
Notably, spending growth is becoming increasingly widespread across the country, Ranchhod says. “We’re still seeing the strongest spending growth in rural regions in the south, where the impact of strong commodity export prices has been the largest.
However, spending is now also picking up in other regions, including Auckland and Wellington.
“That’s an important change from earlier this year. We expect to see spending appetites continuing to firm into next year,” he says.
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