Home loan cuts ‘a story for next year’

Home loan borrowers are likely to have to wait a bit longer for interest rate relief, commentators say.

The Reserve Bank surprised markets on Wednesday when it released its official cash rate (OCR) update.

Although the rate was held at 5.5 percent as expected, it was revealed the bank’s monetary policy committee discussed the possibility of an increase to help tame persistent domestic inflation. The bank also increased its forecasts for the likely OCR peak, indicating a chance of another increase.

The committee said it believed that inflation would return to its target band by the end of the year, but noted there was little room for any nasty surprises in the data.

ASB senior economist Chris Tennent-Brown said wholesale interest rates had been moving around a lot anyway, so the news was not likely to cause a dramatic change to retail rates.

“What the Reserve Bank did makes sense to send a signal that rate cuts aren’t coming quite as soon as some have been hoping, and presumably pricing in to wholesale markets.”

The markets had priced in an OCR cut by November, although the Reserve Bank’s latest forecast indicated it expected no cuts until the middle of next year at the earliest.

“It’s actually just pretty much in line with what we’ve been thinking and baking in to our mortgage forecasts, anyway,” Tennent-Brown said. “There won’t be OCR cuts this year, it’s more likely to be next year. It’s not a big change for us.”

He said it would be interesting to see how long it was before wholesale market volatility died down, and whether that meant that there could further small reductions in the interest rates charged on longer-term fixes.

“The one-year mortgage rate and floating rate are going to hold up until we are really certain that Reserve Bank rate cuts are just around the corner. We’ve been thinking for a while that’s not a story for this year, it’s a story for next year.

“One of the things that’s tough is how much thinking has changed over the last six months. A lot of people, if you’d read a thing saying rate cuts are coming you might have thought ‘let’s fix for six months’. They could have done that late last year or early this year and now be thinking ‘I wish we fixed for 18 months at a lower rate’. That’s frustrating for borrowers.”

He said while longer fixes remained cheaper, taking short fixes still made sense.

“I think people are right to fix for shorter terms and get into much lower rates over the next year or two. It’s taking a bit longer than expected a few months ago. It’s frustrating to be stuck on a six-month or one-year rate that’s high when you could be getting a low 6 percent rate [by fixing longer] but I think next year will be when the popular one- and two-year rates start to come down.”

Infometrics chief forecaster Gareth Kiernan said home loan rates had started to drift lower over recent weeks and this update would put a floor under them for another couple of months.

“Until we get another review or some other data that comes out and challenges the Reserve Bank view a bit.”

Corelogic chief economist Kelvin Davidson said it was worth noting the OCR was not the only influence on home loan rates.

“Factors such as bank competition and offshore financing rates also play an important role. But in an environment where OCR cuts appear even more likely now to be a story for 2025 than 2024, something similar seems a sensible assumption for mortgage rates too.

“As such, conditions look set to remain testing for at least six to nine months for new borrowers, as well as those existing mortgage holders who still need to fully reprice up to current market rates.

“Sales volumes and property values could also remain fairly soft, and even if mortgage rates do start to fall more appreciably in 2025, that’s when the limiting influence of likely debt-to-income restrictions would start to kick in.”

According to the news on Radio New Zealand

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