Kiwi Mortgages


Mortgage Interest Rates Cuts Lie Ahead


News with Tony Alexander – July 2024

The chances are rising that come November the Reserve Bank will start a series of quick interest rate cuts which will see the likes of the one-year fixed mortgage rate fall from around 7.1% currently to just over 6% about one year from now.

This is not the view of the Reserve Bank which a few weeks back predicted no rate cut until the September quarter of 2025. But our central bank has a blind spot when it comes to analysing the state of the economy – they are not well aware of what is happening on the ground in present time.

This is the tendency they strongly revealed in 2021 when monetary conditions were left excessively and unjustifiably loose while the economy’s growth rate accelerated, house prices rose 46%, and the unemployment rate fell to an unsustainably low 3.2%.

The economic data being released now show the economy to be in a worse state than had been expected by economists such as myself and the Reserve Bank. Most notably the monthly surveys I run show a clear deterioration in business and consumer sentiment and spending intentions along with the housing market from about February.

This deterioration appears due to a sharp drop in feelings of drop security, exhaustion of pandemic cash savings which had been built up, a new crackdown on businesses by the IRD, soaring household expenses for council rates and insurance, and widespread anecdotal reports of house building falling away.

The weakness in the economy will eventually be acknowledged with a lag by the Reserve Bank and cover for them to ease monetary policy without having to delve much into why they missed the weakness will likely be provided by changes in a key measure which fully justifies no easing being warranted at the moment.

The proportion of businesses saying that they plan raising their prices over the coming year has averaged 25% during the period when inflation has averaged 2.3% according to the monthly Business Outlook Survey run by ANZ. This measure peaked at over 80% early in 2022 then got stuck close to 50% until recently.

The latest reading taken almost a month ago shows a net 35% of businesses planning to boost their prices. The direction of change has shifted decidedly downward, and this is a necessary development before monetary policy can ease. However, reaching 25% will not be enough and the reading will need to fall probably below 10%.

This is because the 25% average occurred during the past three decades when the pace of growth in our economy averaged 2.7% a year. Currently growth is near zero and highly negative when we allow for the strong population growth of 2.6% this past year.

The way things are deteriorating in the economy currently I am confident we will get the measure down to a desired level ahead of the November monetary policy meeting by the Reserve Bank and they will be able to ease then.

But until we get there the central bank has no incentive to signal to businesses being forced to make tough management decisions rather than continue a cost-plus pricing policy that better times lie ahead. Crushing business pricing behaviour is the last stage of the monetary policy tightening cycle before rate declines can be allowed to proceed.

For home buyers and owners the incentive remains to fix one’s interest rate for a shorter than average period in order to benefit from the falls in interest rates when they come along. But as for when one switches back to favouring three year fixing and longer, there is no reasonable means of picking that time period as yet.

The opinions expressed in this article are the personal views of the author and is not a financial advice or recommendation from Kiwi Mortgages or any of its officers, who shall not be liable or responsible for any information, omissions, or errors present in the article. Please seek specific financial advice before taking any action.