It is interesting how times can change. This time last year, there was a slight bias to an upward movement in interest rates. Toward the later part of the year, we heard a lot of “sitting on the fence”, with even the Reserve Bank of NZ (RBNZ) outlining that an interest rate movement down is just as likely as an interest rate movement up. In the beginning part of this year we have seen a strong push toward sub 4% rates, but then shortly after a re-adjustment back up to just over 4%.

We are now experiencing a strong bias toward a downward pressure on interest rates, with perhaps the sub 4% becoming more of a sustainable downward push. This downward bias can be evidenced through some key supporting factors in the market.

Firstly, at its March meeting the RBNZ left the official cash rate (OCR) unchanged at its record low of 1.75%. We are now starting to hear from the RBNZ the expectation that the next change in monetary policy might see an easing (i.e. lowering of interest rates) rather than a tightening (i.e. increasing interest rates).

The unchanged OCR was widely expected by the market given the weak global economic outlook bringing us to the second key factor putting downward pressure on interest rates. Weaker than expected economic data from most parts of the world, including some of New Zealand’s key trading partners – Australia, Europe and China – all continue to face a lack of momentum in domestic spending.

The third key factor is the lower than anticipated rate of NZ inflation, which saw wholesale rates and the New Zealand dollar fall, as the market prepares itself for a potential decrease in the OCR rate in May. The RBNZ’s monetary policy is to maintain price stability as defined by the Policy Targets Agreement (PTA) which currently requires the RBNZ to keep inflation between 1% and 3%.

The closer inflation gets to 1%, the more likely the OCR cut. This is because monetary policy targeting the cost of money is based on the view that by cutting interest rates, it will enable more money available for consumption and investment, stimulating the economy and therefore increasing prices/inflation. However the effectiveness of monetary policy has come into question over the last decade with interest rates as such historical lows. But whether monetary policy is dead or not is another whole topic itself.

The last key factor to highlight is the movements in retail interest rates themselves. The table highlights multiple lenders now offering sub 4% rates and these aren’t now confined to just the short term one- and two-year rates – they now extend to the three-year rates. This highlights that the longer-term end of the interest rate tail is also starting to feel the downward pressure.

Opportunities For Barrowers

Borrowers should take some comfort in these movements, as at this point rates will most likely stay even lower for longer. The sub 4% two-year rates still present value, however the three-year rate is starting to come into play as rates start to tighten at this end of the interest rate table.

Borrowers with good profiles continue to be in a position of strong negotiation. As always, it’s worthwhile shopping around for the best rate or working with a mortgage adviser to negotiate on your behalf.