Will interest rates drop in 2023 in New Zealand?

The Reserve Bank of New Zealand (RBNZ) followed market forecasts and raised its official cash rate (OCR) by 50 basis points (bps) to 3.5% during its October meeting. According to the minutes, the committee debated hiking rates by 75 basis points before settling on a half-point adjustment because of the central bank’s concern over rising core consumer price inflation. Despite the slowness of monetary policy transmission, the board warned of future rate hikes. It was highlighted by policymakers that domestic activity in Q3 of 2022 may have been slightly higher than initially assumed, despite declining expenditure on durable goods, which may be more sensitive to interest rates. The RBNZ understood that falling housing prices and falling asset values would have an adverse effect on household spending in the short term. The committee has increased rates by 305 basis points (bps) since October 2021, when they were at a record low of 0.25%. New Zealand’s interest rate is set by the Reserve Bank of New Zealand.

The interest rate is the official cash rate. The Bank checks in on the OCR eight times each year since its inception in March 1999. The OCR allows the Reserve Bank of New Zealand to influence the cost of borrowing money and so keep inflation and economic growth under control. Two unfavorable outcomes result from this for real estate investors: increased mortgage rates and lower rental revenue from investment homes. Now many investors are uncertain of the future direction of interest rates.

So, in what direction do you think interest rates are heading right now?
Typical interest rates are increasing and reverting to normal. In 2021, interest rates for New Zealanders will be at historic lows. The average rate on a fixed-rate mortgage for a year just hit a record low of under 2.2 percent. What may have caused that? To stimulate the economy during the Covid-19 shutdowns, the Reserve Bank lowered the OCR. That was done so the country wouldn’t go bankrupt. The plan was successful. However, this contributed to economic overheating alongside supply restrictions and a scarcity of workers. Supply has been overwhelmed by surging demand, and inflation has reached 7.2% (September 2022). As a result, prices across the board have increased.

The Reserve Bank has gradually increased the OCR in an effort to rein in inflation. Last October, it was raised for the eighth time in a year, from 0.25% to 3.5%. The OCR has recently reached its highest level since the middle of 2015, and more increases are anticipated before the end of the year. Raising interest rates has the opposite effect, slowing consumption and relieving economic strain. There will be even more to come.

So, how do you see interest rates developing in the future?
At Opes, we help real estate investors plan for the future by estimating the income their assets will provide. It will require some foresight into the future of mortgage interest rates. The average rate on a 1-year fixed mortgage is expected to be 4.50% at the end of the projection period (which begins in 2023 and ends in 2024) after fluctuating between 5.00% and 6.25%.

Typical Interest Rate Over the Long Term
Predictions of future interest rates benefit by first looking at the average over a lengthy period of time. Why? Foreseeing the future of interest rates is easier if you have a sense of their historical range. The average annual percentage rate for a 1-year fixed loan during the past decade is 4.45%. One may say that interest rates are back to “normal” now.

The current 10-year average is lower than this (4.34%), but 4.50% is a decent target for a long-term rate. Keep in mind that it’s not a flawless forecast, but it might serve as a good guess anyway. For this reason, starting in Year 3 we return to our long-term average.