What now for home loan rates?

The official cash rate might have been cut – but how much further can we expect home loan rates to fall?

The Reserve Bank cut the OCR on Wednesday by 25 basis points (bps), taking it to 2.25%.

That was widely expected, but what was a little more surprising was how little room the bank left itself for further cuts to come. It said it would cut again if it needed to, but only if the economy was likely to really underperform its latest forecasts.

It forecast a bottom for the OCR of 2.2%, indicating little room for downward movement, and for increases to 3% around the end of 2028.

While banks responded with cuts to floating rates, commentators said the indication that the Reserve Bank probably thought it had done enough in terms of interest rate cuts meant fixed rates might not have much further to fall.

Markets had already priced in the 25bps reduction, and a trough in the forecast of 2.15%. One-year swap rates have fallen from more than 3% in August to less than 2.5%.

Kiwibank chief economist Jarrod Kerr noted that swap rates rose by a little more than 5bps after the announcement.

Infometrics chief forecaster Gareth Kiernan said there could be pressure in the near term for the bigger banks to match the one-year rates being offered by banks such as SBS and the Bank of China.

SBS has been offering 3.99% for one year and the Bank of China 4.28%. The big banks are all advertising 4.49%.

“However, today’s statement means there’s little likelihood of wholesale rates heading much lower unless we get a bad run of economic data or the market’s AI bull run suddenly ends,” Kiernan said.

“Having said that, with the OCR expected to hold around current levels for about a year, I don’t think there’s a massive hurry to rush out and lock in a fixed rate – it’s probably not until mid-2026 that any upward trend might start to emerge in most of the retail rates.”

BNZ chief economist Mike Jones agreed that if the OCR had fallen as far as it would go then there was limited scope for mortgage rates to keep falling. He said Wednesday’s move had been more than 100% priced in by markets.

“We probably thought it was on its last, or that downtrend was on its last legs anyway, and the statement today was probably more of a shift towards a neutral bias.

“They are not quite there, but more of a shift than people might have expected. So I think the scope that perhaps was there to keep cutting mortgage rates has been reduced a little bit because we’ve seen wholesale interest rates jump up a bit. That may not stick around because, of course, the bank has given itself that optionality to respond if some of the signs of life in the economy don’t get established over the summer.”

He said what happened internationally would also play a part.

It could mean it was time to lock in a longer rate, he said. “People sort of dipped their toes into long-term fixes if you look at bank data a few months back but then kind of backpedalled into the shorter fixed terms… I think we are going to see more of a debate from here about fixing terms and whether it’s time to push out the average term of borrowing a bit further into the future.”

ANZ economist David Croy said the bank had for some time been of the view that the low point in the mortgage rate cycle was approaching and borrowers could benefit from locking in a longer term.

rnz.co.nz