Key Facts

  • Financial markets project a faster drop in interest rates than initially expected, with around three rate cuts anticipated from mid-next year.
  • Trends in wholesale interest rates from May to October indicate a more rapid easing of global inflation.
  • Outlooks from the Reserve Bank reveal reduced upside risks to the mortgage outlook in recent months.
  • ANZ has adjusted its forecast for another official cash rate (OCR) increase, predicting the rate to stay at 5.5% until the Reserve Bank deems a cut suitable.
  • Westpac remains the only major bank still predicting another hike.
  • The market has priced in two 25bp OCR cuts for next year, with consideration for a third cut.
  • Current changes in market expectations do not pose issues for the Reserve Bank as retail home loan rates continue to gradually rise.
  • Kiwibank modified its rates recently.
  • Careful handling of forthcoming bank forecasts is necessary to prevent prematurely low wholesale rates.

Article Summary

In a shift that brings relief to home loan borrowers, financial markets now anticipate a faster drop in interest rates, with projections including around three rate cuts starting from the middle of next year. This turn in sentiment comes as data between May and October suggests a quicker easing global inflation than feared.

The Reserve Bank has pared back expectations for another rate hike, signalling a reduction in the upside risks to the mortgage outlook over recent months. Meanwhile, leading banks hold contrasting views about the official cash rate (OCR). ANZ projects the OCR to remain at 5.5% until the Reserve Bank is ready to make a cut, while Westpac maintains an outlook for another increase.

The market has notably priced in two 25bp OCR cuts for 2022, with a third cut under consideration. In spite of these projections, no challenges are posed to the Reserve Bank as retail home loan rates slightly rise, contributing to additional tightening. The recently adjusted rates by Kiwibank substantiate this trend.

The Reserve Bank needs to handle the tone of the next forecasts carefully, avoiding a premature fall in wholesale rates. For the time being, term deposit rates have held steady and no changes are reported.

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