Further mortgage rate drops unlikely despite ongoing bank competition as RBNZ signals the end of easing
After speculation over whether the February OCR decision will bring rates lower, we seem to be at the end of the cycle.
The Reserve Bank has drawn a pretty firm line under interest rate cuts following last week’s reduction of the official cash rate to 2.25%, with economists suggesting the easing cycle has run its course.
Westpac NZ chief economist Kelly Eckhold said the central bank's stance was firmer than expected, leaving only a narrow window for further cuts if the economy deteriorates significantly.
"The Reserve Bank seems to be drawing a reasonably firm line under it, probably a bit firmer than I would have expected going into the meeting," Eckhold told NZ Adviser. "In reality, they seem to be pretty comfortable that they've done enough."
Reserve Bank Governor Christian Hawkesby told the Finance and Expenditure Committee there was a high bar for further easing, suggesting only a substantial economic shock would trigger additional cuts rather than minor misses on unemployment or GDP figures.
Eckhold notes that the door has remained slightly ajar, but now the question is more around how long we stay at the current level.
“The recent indicators seem to justify that stance,” he said. “I think it’s a question of how long the rate remains at 2.25% as opposed to whether it needs to go lower.”
Rate drops unlikely, housing market forecast
Westpac forecasts house price growth of 5.4% next year, exceeding the Reserve Bank's prediction of 4%.
"Our forecasts have been a little north of the Reserve Bank's expectations for a while now," Eckhold said.
"I think they’re still a little cautious on what’s going to happen, and that seems reasonable as we’re not seeing any strong upwards pressure on prices just now. But the longer interest rates stay down here, the stronger the market will get.”
Recent credit data shows continued growth in private sector lending, driven by both business credit and property investor demand.
With plenty of mortgages coming up for re-pricing each month, Eckhold says that competition between the banks won’t be easing off any time soon. While rates aren’t likely to get much lower, we’ve seen some strong cash back offers, including ANZ’s recent 1.5% offer.
“Every month there’s opportunity for banks to get some business off of other banks,” Eckhold said.
“I guess it’s reasonable to expect that that competitive environment will continue. In terms of interest rates, whilst there might have been some potential for fixed rates to fall a bit, now that the Reserve Bank has come out so clearly and said “the cycle is over”, wholesale rates have risen. So it doesn’t seem very likely that more drops will happen.”
Supply still moderating price growth
Despite falling interest rates over the past year, house price growth has remained relatively subdued, partly due to sustained construction activity maintaining supply levels.
Eckhold noted that the construction industry has contracted a lot from the peak that it got to in 2022-23, and has plateaued at a relatively high level.
“"That's probably one of the reasons that we haven't seen more price growth in the last six months compared to what you might have thought, considering how far interest rates have fallen,” he said.
With decent building activity continuing to add supply to the market, price pressures have been contained. However, recent increases in building consents suggest further supply is in the pipeline.
"Because there's been a decent amount of building activity occurring, there is plenty of supply hitting the market," Eckhold said. "I think there is another decent rise coming - the rise in consents over the past few months tell us that."
