In its October Monetary Policy Review, the Reserve Bank of New Zealand (RBNZ) held the Official Cash Rate (OCR) at 2.75 percent, following increases in July and September. The decision was split: four of the seven members of the Monetary Policy Committee voted to hold, while three voted for a 25 basis point increase to 3.00 percent.
According to the RBNZ, this was a closely balanced call. Annual inflation eased to 3.7 percent in the September quarter, lower than expected, and wage growth and medium-term inflation expectations remain subdued and stable. Against that, fuel prices have risen further, the New Zealand dollar has fallen, and the RBNZ expects inflation to lift again to 4.4 percent in the December quarter. Those favouring a hold wanted more time for the two recent increases to work through a recovery that remains uneven, with weak household spending and falling house prices. Those favouring an increase were more concerned about inflation becoming entrenched, with core inflation now around the top of the RBNZ’s target band.
All members agreed that tighter monetary policy is likely to be required, though the RBNZ stressed that this remains conditional on the economic outlook. The next decision is the December Monetary Policy Statement, and the RBNZ noted that information arriving over the next six weeks could change the picture in either direction.
October’s hold doesn’t change our fundamental advice. In our view, it is a pause not a pivot: the RBNZ has been clear that further tightening is likely, so the case for planning ahead remains firmly in place. Floating rates and shorter fixed terms respond most directly to the OCR, so with no change in the October update, they should be unaffected by the decision itself. For most borrowers, the real impact will come when your fixed term ends and you refix.
Fixed rates don’t wait for the OCR decision. They are priced off wholesale swap rates, which move on market expectations, and those have already risen on expectations of a higher OCR and higher global long-term interest rates. The RBNZ noted that some rates have eased slightly recently, as lenders have passed on less of that rise, but that could change if wholesale rates keep climbing. As a rough illustration, every 0.25 percentage point added to your rate costs about $94 a month on a $600,000 loan over 30 years, which is why the gap between the rate you are on now and the rate you refix at is what matters.
From a structure perspective, we still favour the two-year fixed rate for most borrowers, as it offers the best combination of certainty and value. The three-year rate is a little higher and could suit those wanting more certainty. In general, we are not recommending fixes of six to twelve months for most borrowers right now, given the risk of rolling off into a higher rate environment. Splitting your lending across terms is also worth considering, as it avoids refixing everything at once and balances rate, flexibility and certainty. Keeping a floating or offset portion adds flexibility for extra repayments, though that portion will respond to OCR changes straight away.
If your fixed rate is due to expire in the next six to twelve months, it is worth reviewing your situation sooner rather than later. For some borrowers it will make financial sense to consider locking in ahead of time, and a pause in the OCR can be a useful window to do that before the RBNZ’s December decision. Whether that stacks up depends on your remaining term, your lender and any break costs, so it is worth running the numbers with your adviser before making any call.
For reference, the latest negotiated rates* our advisers are seeing include:
* Please note these figures represent negotiated rates our advisers have secured on behalf of clients and may differ from advertised rates.
If repayments are becoming a struggle on your home or investment property, or you can see they will be when your fixed rate ends, please speak to your adviser early. There are often levers that can be pulled to provide some relief but these are far easier to put in place before repayments are missed than after.
October’s hold gives borrowers some breathing space, but not a change of direction. The RBNZ has been clear that further increases are likely, and the open question now is timing. Borrowers who plan ahead, and structure their lending sensibly, will be better placed than those who wait and react.
If you have a mortgage coming up for refix, want to make sure your current structure still makes sense, or are finding repayments harder to manage, now is the time to have that conversation. The earlier we talk, the more options there usually are.
If you would like personalised advice on your next step, click here to book a complimentary review with your adviser.
The content of this article should not be taken as financial advice, or a recommendation of any financial product. These insights are based on current economic commentary, market pricing for interest rates, and our personal opinion. Threefold is not liable or responsible for any information, omissions, or errors present.
