Interest rates likely to start falling in March 2025

Reserve Bank of New Zealand (RBNZ) forecasts suggest the official cash rate (OCR) is at or near its peak, although the central bank has pushed back the timing of the first rate cut.

The RBNZ left the OCR at 5.50% in both July and August, following 12 consecutive rate rises, and is expected to leave rates on hold again at its next meeting, on October 4.

The latest Monetary Policy Statement, which was released in August, suggests the OCR will climb to 5.60% in the March 2024 quarter, return to 5.50% in December 2024 and fall to 5.40% in March 2025.

By contrast, the previous Monetary Policy Statement, released in May, forecast that the OCR would peak at 5.50% and then fall to 5.40% in the September 2024 quarter.

Crucially, inflation, which peaked at 7.3% in the June 2022 quarter and was 6.0% in June 2023, is expected to fall to 2.7% by September 2024, placing it once again within the RBNZ’s target range of 1-3%.

Unemployment, which was 3.6% in the June 2023 quarter, is forecast to rise to 4.4% by the end of this year and 5.3% by the end of next year, before moderating to 5.1% by December 2025.

The reason the RBNZ aggressively increased interest rates between October 2021 and May 2023 was to reduce inflation by slowing the economy. Judging by the forecasts above, the RBNZ appears to believe it is on track to achieve its goal.

RBNZ says property prices have stabilised

Meanwhile, the Monetary Policy Statement suggested property prices had now bottomed out.

“We assume house prices grow gradually over the next year before increasing at a slightly faster pace in nominal terms over the remainder of the projection,” the Reserve Bank said.

“Although house prices have stabilised, they are significantly below their previous peak. This lower level of house prices is expected to flow through to less household spending over the projection, as aggregate household wealth has fallen substantially."

CoreLogic Chief Property Economist Kelvin Davidson said that while he essentially agreed with the RBNZ forecast, one potential spoiler was an ongoing decline in the number of properties being listed for sale.

“This could potentially trigger some more abrupt competitive price pressures amongst buyers than we’re currently anticipating, although in turn this would tend to bring forward more listings and mitigate some heat for prices,” he said.