Why interest rates may already be near the bottom
A leading independent economist has warned borrowers “not to get optimistic about big rate falls this year”.
One reason Tony Alexander does not expect the official cash rate (OCR) to fall by that much in 2025 is because, in December, the US Federal Reserve changed its prediction for 2025 from four cuts to only two and indicated the economy was in better shape than previously forecast. The importance for us here is that scope for falls in fixed borrowing costs in New Zealand for periods of three years and longer looks now to be very limited,” he said.
Another reason Mr Alexander did not expect the OCR to fall much further was because, although the New Zealand economy is weak, it appears to be strengthening, thereby starting to add inflationary pressure to the economy. On a related note, a recent business survey revealed an increase in the share of businesses expecting costs to increase.
“If I were a borrower, what would I do? Not be optimistic that interest rates will fall much this year,” he said.
“People are highly confident that the economy will be stronger this year than last year and 2026 will be even better. As a rule inflationary pressures are stronger the faster the rate of growth in one’s economy unless that growth is driven by a surge in productivity – which hasn’t happened in New Zealand for a long time and doesn’t look likely in the near future. This means that the natural tendency of inflation will be to start cyclically rising at some point in the next two years and, as I noted from probably late in the September quarter last year, that is where my focus now is – not the short-term inflation outlook.
“This matters because monetary policy aims at influencing inflation 18-24 months down the track and by then from now the unemployment rate looks like it will comfortably be falling again and businesses will before the end of this year likely have regained pricing power.”
Given those factors, Mr Alexander wondered: for how long would he keep fixing his mortgage debt for just six months before fixing the majority of his debt for at least five years?
“That is impossible to say, but my gut tells me I’ll make the switch before the middle of this year,” he said.
“At the moment I could fix for three years at around 5.6%. I feel that with the margin for this rate looking a bit high I’d like to wait for a rise in bank competition to drive a round of cuts before fixing at about three years, or maybe two, though that rate currently is only 0.1% less than fixing for three years.”
Are any of your clients seeking advice around interest rates and loan structures? If so, refer them to me – I’ll be happy to answer their questions and provide expert recommendations.