Key Facts

  • The Reserve Bank has indicated that there’s little hope for a cut in the official cash rate (OCR) before 2025. However, economists suggest that changes in the mortgage rate can still happen.
  • Several factors could potentially lower rates within the next year, even if the OCR remains at 5.5%.
  • ANZ chief economist Sharon Zollner suggested that fixed mortgage rates could fluctuate greatly due to shifts in market expectations and offshore influences, particularly from US data.
  • Westpac chief economist Kelly Eckhold highlighted the major recent fall in wholesale rates, implying that this should, in due time, influence retail rates.
  • Deposit rates have remained high despite dropping wholesale rates. This has necessitated higher mortgage rates, and competition within the deposit market appears poised to potentially affect rates in the long term.
  • Some economists predict a possible cut in the OCR by the end of 2022.
  • The expectation is that interest rates are unlikely to drop back to pre-Covid or Covid lows.
  • The Reserve Bank has updated its estimate of the “neutral” OCR to 2.5%, indicating a higher base level of rates.

Article Summary

While the Reserve Bank has signalled that the official cash rate (OCR) is not likely to be reduced before 2025, economists believe some changes could be seen by those borrowing home loans. They argue that despite the OCR potentially staying at 5.5% throughout the coming year, fixed mortgage rates could fluctuate as per market expectations and trends in US data.

Financial experts, like ANZ chief economist Sharon Zollner, have noted that while the OCR does have a significant role in determining floating mortgage rates, fixed rates are influenced by OCR projections and international data. With the Reserve Bank having limited control over longer rates, market expectations could lead to changes in the rate environment.

Deposit rates continue to remain high despite a decrease in wholesale rates, causing mortgage rates to also stay elevated. Competition in the deposit market is stiff, and these deposit rates play a crucial role in the cost of funds for the banks. This situation has implications for both savers and borrowers in the market.

Few economists predict a potential cut in the OCR by the end of 2022, however, consumers should avoid expecting interest rates to drop back to pas levels. The Reserve Bank has lifted its estimate of a neutral OCR to 2.5%, signalling higher baseline rates for the foreseeable future.

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