The consensus among market analysts and economists is that the Reserve Bank of New Zealand Official Cash Rate (OCR) will drop no later than November of this year, with a significant chance of an earlier reduction. Current market pricing indicates a 100% chance of an OCR cut by November and an over 50% likelihood of a drop in August.
Given how concerning recent economic indicators have been, we strongly believe the OCR should be cut in August. However, given its approach to monetary policy, Reserve Bank Governor Adrian Orr may wait for further evidence of inflation dropping before making any changes.
When the rates do drop, it is expected they will decrease by 0.25% at each subsequent OCR announcement (approximately every six weeks). Many economists are forecasting a series of eight consecutive drops, which would result in rates around 5% +/- by late 2025.
Given the likely significant drop in rates, we are advising that clients hold off on refixing their rates until one-to-two weeks out from when their rates will expire. For most clients we are strongly advocating that they then fix all their lending for six months. While this may involve paying slightly more now, the potential savings from rates having dropped in six months are expected to be substantial. Typically, we recommend splitting risk by choosing different fixed-rate terms. However, in this instance, we are firmly in favour of fixing for a six-month term. If clients wish to diversify their risk, the one-year rate is the only other term we see as viable. We see no benefit in fixing rates longer than 12 months.
These insights are based on current economic commentary, market pricing for interest rates, and our personal opinion. Ultimately, you need to make your own decision, as no one can predict exactly what will happen with rates, especially in the longer term.
We recommend speaking to one of our qualified financial advisers before taking any action.
The content of this article should not be taken as financial advice, or a recommendation of any financial product. Threefold is not liable or responsible for any information, omissions, or errors present.