“I would say the expectation of the longer-term rates coming substantially lower is probably a lot less now.
“That depends on the funding costs for banks and that’s again being influenced by what’s going on in those global rates.”
Investors worldwide are demanding higher returns on longer-term US Government bonds (debt) relative to shorter-term bonds, because they’re worried about the impact US President Donald Trump’s policies will have on the country’s fiscal deficit, as well as the potential for tariffs to keep inflation buoyed to the extent it reduces the Federal Reserve’s ability to cut interest rates.
Investors also want higher returns to account for the array of geopolitical risks they face.
This situation affects the interest rates New Zealand banks pay to borrow money from offshore to lend to Kiwis.
RBNZ governor Adrian Orr discussed the situation when the bank last reviewed the OCR in November. He told borrowers, “the thrill [of OCR cuts] might not be as big as what it looks like”.
On Wednesday, he made a similar point, as Silk noted the average interest rate banks collectively receive for all their mortgage lending is expected to fall from about 6.2% to 5.7% by December.
This would take the figure back to what it was in late-2023, when monetary conditions were tight, and put it higher than it was pre-Covid.
“Now, don’t get upset listeners,” Orr said at the press conference, assuring borrowers OCR cuts were still putting downward pressure on rates.
He noted banks had cut mortgage rates quite a bit in anticipation of further OCR cuts.
He also believed that as demand for new mortgages continued to pick up, banks would compete more aggressively for business.
“Banks will be sniffing and hunting, and who knows, some of the future cuts to the mortgage rates may even come from [profit] margins,” Orr said.
While longer-term mortgage rates aren’t expected to fall too much, borrowers are expected to feel relief from lower rates quite quickly.
In recent months, around 90% of new mortgages have been directed at terms of a year or less. About half of the country’s stock of mortgage debt is also due to be repriced within the next six months.
The RBNZ didn’t believe lower mortgage rates would see the housing market take off.
It revised down its annual house price growth forecasts from November. It predicted growth dipping into the negative during the first half of the year, before picking up to 3.8% by the end of the year, and remaining in the low single digits for the next couple of years.
The RBNZ said, in its quarterly Monetary Policy Statement, it was concerned about the dampening effect geopolitical instability and tariffs could have on economic growth in New Zealand.
As for house prices, Orr believed the RBNZ’s recent imposition of debt-to-income bank lending restrictions would help prevent the housing market from overheating as it did during the pandemic.
The rules cap banks’ lending to owner-occupiers seeking mortgages worth more than six times their annual incomes, and residential property investors wanting debt worth more than seven times their annual incomes.
The rules, which took effect in July, haven’t had any bite yet, because high interest rates have made it unaffordable for people to borrow a lot compared to their incomes.
But they’re expected to become more restrictive as interest rates fall.
Orr compared the rules, aimed at keeping the financial system stable, to a “seatbelt”.
“There is plenty of room to move and play in the back seat, but you’re not going to go flying through the windscreen,” he said.
“It will act as a good moderation for lending behaviours.”
Jenée Tibshraeny is the Herald’s Wellington business editor, based in the Parliamentary Press Gallery. She specialises in government and Reserve Bank policymaking, economics and banking.
