Three things that might bring home loan rates down faster

A number of factors may be converging that could bring interest rates down more quickly - and two-year fixed home loans to at or below 5 percent by the middle of next year, commentators say.

The banks have been cutting interest rates in recent weeks, taking two-year fixed rates below 5.8 percent, from a peak of about 7 percent late last year.

Commentators say developments offshore and domestically could help keep that pressure on.

Bank competition

Housing market turnover is low, which may make banks keener to compete for the smaller number of customers who might be looking for a home loan.

But David Cunningham, chief executive at mortgage broking firm Squirrel, said although it seemed that the banks were vying to have a market-leading rate, the situation couldn't be described as a "mortgage war".

He said banks had pricing committees that went through weekly cycles making decisions on rates depending on what was happening in the market.

"Given the big falls in wholesale interest rates, we're seeing retail interest rates catch up. Term deposit (TD) rates for six months are still around 5.75 percent, with the wholesale rate for six months at 4.75 percent - yes, 1 percent lower - I'd expect TD rates to drop by at least half a percent over the next month or so, which would mean those shorter-term fixed home loan rates, of six to 12 months, would fall by a similar amount.

"Bank margins are still fat compared to wholesale rates. A price war would be where bank margins are being squashed."

The Federal Reserve

The US Federal Reserve cut its policy rate by 50 basis points on Thursday, twice what had been expected.

Infometrics chief forecaster Gareth Kiernan said it had also been "reasonably emphatic" in its language about inflation being beaten.

"If the Fed continues to cut interest rates rapidly, there is a chance that it will place downward pressure on the US dollar and/or upward pressure on other currencies such as the New Zealand dollar.

"This shift would act as a de facto tightening in monetary conditions in New Zealand, reducing returns to exporters - and although beef and dairy prices have been gradually recovering over the last nine-12 months, they are still relatively low, particularly in the context of the big cost increases for farmers that occurred between 2021 and 2023.

"The natural response to this outcome would be for our Reserve Bank to also cut interest rates more quickly, thereby increasing the probability of one or two 50 basis point cuts here as well."

But he said the difficulty would be that it was non-tradeable, domestic inflation that had been the biggest problem for the Reserve Bank so far. It was not news to the Reserve Bank that inflation in the US was under control, he said.

BNZ chief economist Mike Jones said the aggressive Fed stance added to the chance that the Reserve Bank could increase the pace of cuts before the end of the year.

"We've seen wholesale rates continue to trend steadily lower over the past few weeks, with the 'Fed effect' undoubtedly part of the story. If wholesale rates keep trickling lower in the manner we expect we'll see retail rates follow suit. Our rough expectation is that delivers a two-year fixed mortgage rate, for example, of around 5 percent or perhaps a little lower by the middle of 2025."

GDP

Jarrod Kerr, chief economist at Kiwibank, said the gross domestic product (GDP) update on Thursday showing the economy had contracted again was also likely to be an important factor.

The economy reduced in size by 0.2 percent in the June quarter, the fourth quarterly contraction in the last seven quarters and taking the economy back to levels last seen at the start of 2023.

It is a smaller drop in activity than the Reserve Bank forecast but Kerr said the drop would still prove that restrictive monetary policy had done enough damage to restrain inflationary pressures.

"Enough is enough. And the Reserve Bank are responding - late, but in earnest. A rate cut in October is as close to a done deal as you get. In fact, we'd argue the only discussion should be on delivering 25 or 50. We'd advocate 50.

"And again, 50 in November. The Reserve Bank's first 25bp cut in August marked the start of a move towards 2.5 percent to 3 percent. That's at least 250-to-300bps [of cuts]. We argue the Reserve Bank needs to get the cash rate below 4 percent, asap. It takes up to 18 months for rate cuts to filter through the economy. We all love fixed rates. And fixed rates need time to roll off. Effectively, the Reserve Bank are cutting today for an economy at the end of 2025, the start of 2026. Get moving."

But at ASB, Kim Mundy said it was unlikely to significantly alter the picture for the Reserve Bank.

"The economy is weak, as to be expected after a prolonged period of restrictive monetary policy. Further OCR cuts should help to spur some economic growth (especially the interest rate sensitive sectors). However, ongoing headwinds, including our expectation for further weakening in the labour market, suggests we are unlikely to see a rapid turnaround in the economy. We expect a more pronounced recovery will become evident as we progress through 2025. We continue to expect the RBNZ to cut the OCR by another 50bp in 2024 [and 25bps in November] with steady declines over 2025, taking the OCR to 3.25 percent. "