Refixing wave cushions borrowers as markets eye later hikes
New Zealand interest rate markets have shifted sharply since the Reserve Bank’s (RBNZ) November policy meeting, with investors taking seriously the message that “further OCR cuts are unlikely”, according to Westpac senior economist Satish Ranchhod (pictured).
Markets have pushed up short‑term rates, signalling “upward pressure on borrowing rates in both mortgage and wholesale markets.”
Ahead of the statement, traders had been pricing some chance of the official cash rate falling to 2% by mid‑2026 and staying below 2.5% until mid‑2027. That profile has been “swung around sharply”.
At the time of writing “only 3bps of easing was priced in over the coming months”, with a hike to 2.5% fully priced by the end of 2026 and “several further increases expected over 2027.”
Wholesale interest rate swap rates have risen by 15–30 basis points, with longer maturities rising more than shorter terms.
Wholesale moves feed into retail mortgage pricing
Ranchhod notes the rise in wholesale borrowing costs “has implications for retail mortgage rates”.
Banks typically pitch mortgage rates at a margin above funding costs, and “wholesale swap rates are a key component of those funding costs. This means that as wholesale rates rise, the likelihood of retail interest rates increasing (including mortgage rates) also rises.”
At the same time, the margin between retail and wholesale rates “is as narrow as we have seen since the start of 2024”, and much tighter than the average since 2010. During the COVID period in 2021–23, margins were lower again, but 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.”
“This suggests that it is longer‑term mortgage rates that might be under the most pressure to rise,” Ranchhod said, given longer‑term wholesale rates have reacted the most to the RBNZ’s “less dovish stance”.
Other major banks, including ASB and Kiwibank, have also suggested 2.25% is likely the trough for this cycle, reinforcing the sense that mortgage rates are now more likely to stabilise or drift higher than fall meaningfully further.
No imminent hikes, but outlook for rates ‘cloudy’
Despite markets pricing in eventual hikes, Ranchhod stresses “the outlook for interest rates remains cloudy.” While RBNZ signalled “a high hurdle for further OCR cuts”, there was “certainly no signal of OCR increases in the immediate future.”
Westpac continues to forecast “a gradually improving trend in the economy”. Above‑trend growth will take time to absorb spare capacity, allowing “policy settings to remain supportive so long as inflation remains contained.”
If that plays out, wholesale interest rates “might not rise much further and there would not be further upward pressure on retail mortgage rates.”
In the meantime, “it’s also possible the RBNZ could find an avenue to make some public comment on evolving financial conditions.” Ranchhod said, “We doubt the RBNZ intended to materially tighten financial conditions.”
A clarification that normalisation of the OCR is not coming sooner than expected “may also help to cap wholesale rates and ease the tightening in financial conditions.”
Refixing wave: Many borrowers still moving to lower rates
The pressure on borrowing costs is notable just as a large cohort of fixed‑rate loans comes up for repricing.
“We’ve already seen around 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 said.
Even if the cutting cycle has likely ended, many borrowers will still roll onto 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,” Ranchhod said.
"Accounting for when borrowers fixed their mortgages, “the average ‘effective’ mortgage rate that borrowers are actually paying has already fallen from 6.39% in Oct 2024 to 5.36% in September 2025 (down 103bps). We expect further falls over the months ahead.”
Lower servicing costs feed through to spending
That 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.”
Ranchhod points to “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,” the Westpac economist said. “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 the new year.”
Building sector shows early signs of turning
It is “not just retail spending” that has been picking up.
“We’ve also seen encouraging signs emerging in the building sector, including a stronger-than-expected 2.8% rise in residential building in the September quarter,” Ranchhod said.
“The sharp fall in home building over the past few years now looks like it has been arrested, and the number of new projects being consented has started to trend higher in recent months.”
That “bodes favourably for home building activity over the year ahead (though we still expect the recovery will be gradual, reflecting factors such as the softness in house prices and sizeable increases in the housing stock over the past few years).”
Businesses still cautious on hiring and capex
Even with signs that demand in the economy is firming, “there still clearly some caution among businesses.”
Ranchhod says that “while firms are no longer shedding staff, they’re reluctant to take on new workers at this stage. Similarly, businesses are hesitant about committing to significant capital expenditure.”
“That’s been clearly evident in the non‑residential building sector, with a continued drop in the amount of work being completed and a further fall in planned projects,” he said.
GDP and HYEFU: Recovery showing up in the data
“With signs that economic activity is turning higher, our forecast for September quarter GDP growth is now tracking at 0.6%, up from 0.4% previously and higher than the RBNZ’s MPS forecast (which was also 0.4%),” Ranchhod said.
“We’ll finalise our pick once the last set of indicators is published this Thursday, ahead of the GDP release on 18 December.”
On the fiscal side, Westpac’s preview of the Half‑Year Economic and Financial Update (HYEFU) expects a mixed picture versus Budget 2025.
“We expect that the HYEFU forecast for the full‑year OBEGALx deficit in 2025/26 will slightly exceed the Budget 2025 forecast, but that the government’s funding needs will be no higher than forecast," Ranchhod said.
"As a result, we think it is likely that NZDM will confirm the $38bn bond issuance programme for this year that was forecast in Budget 2025 (T‑bill/ECP issuance will be less than forecast in Budget 2025). We don’t have much cause to expect sizeable revisions to the Treasury’s economic and fiscal forecasts beyond the current year, and so forecast bond issuance in the out years is also likely to be close to the Budget forecast.”
Outlook: ‘Lower interest rates are doing their job’
“With signs that economic activity is turning higher,” Ranchhod said, “the recent stream of Kiwi data continues to show signs of recovery, particularly across the interest rate sensitive sectors of the economy. It’s what we’ve long been waiting to see. And what we hope to see more of into 2026. Lower interest rates are doing their job. The medicine is working.”
To read the full Westpac economic commentary, click here.
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