October 2024: Interest rates unlikely to hit GFC lows

News with Tony Alexander – October 2024

The Reserve Bank will conduct their next review of the official cash rate on October 9 and there is a universal expectation that another cut will be made to follow the 0.25% reduction on August 14. Partly because of the strong 0.5% start to the United States easing cycle a few weeks ago many people are predicting that the cut here will also be 0.5%. But that is not certain.

There are certainly signs of deep weakness in the NZ economy and although consumer confidence measures have improved they remain at below average levels which tell us retailers should not anticipate good Christmas sales this year. But what really matters to the Reserve Bank is how indicators of inflation are tracking and in that regard there is no basis for expecting the pace of policy decline to accelerate.

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The ANZ Roy Morgan Consumer Confidence monthly survey includes a question about where people expect inflation to be in a year’s time. The latest reading of 3.8% is down from 4.3% at the start of the year but unchanged from August and actually up from 3.7% in July. The business pricing intentions measure from the ANZ’s separate Business Opinion survey has recently gone up from a net 35% of businesses planning price rises in June to 41% in August.

But we can never know for sure what our central bank is thinking so cannot rule out a 0.5% official cash rate cut in a few days. It’s safe to say that interest rates will continue to go down and the Reserve Bank have pencilled in a cash rate of 4% at the end of 2025 and 3% at the end of 2026. Some forecasters are picking that the cash rate will in fact go to the 2.5% level seen during the Global Financial Crisis. However, that seems a tad optimistic from a borrower’s point of view when we consider the various factors which may keep inflation above post-GFC levels.

Read Also – Reserve Bank of NZ to cut Mortgage Interest Rates

First, productivity growth in our economy has slipped away and that means for any given rate of growth in the economy inflation will be higher than before. Second, extra costs are coming from the effects of climate change. Third, councils have said they plan to keep raising rates at well above the rate of inflation for the next few years.

Fourth, the world is slowly moving away from free unencumbered trade and as tariffs return in fits and starts this means higher prices than would otherwise be the case.

The future is certainly not one of high inflation as such. It is more the case that expectations of how comfortable the coming inflation environment will be seem somewhat over-optimistic.

The main implication of this is that medium to long-term interest rates may not fall as far as borrowers are currently thinking. Thankfully that does not alter the sense for the moment of keeping one’s mortgage fixed interest rate period short – say 6 or 12 months. But it does mean there is a chance that when rates reach their cyclical lows the medium to long rates could sit at higher levels than people may be thinking.

How does that matter given that research shows all the fixed mortgage rates tend to reach their cyclical lows at the same time? The gap between staying short and moving out to fix long could once again be quite wide and some people will baulk at making the leap from six months to three years. Every cycle when rates reach their lows people find it hard to justify paying a higher rate to fix long than short. That experience looks certain to reappear come 2026.

By Tony Alexander

The opinions expressed in this article are the personal views of the author and is not financial advice or recommendations 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.

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