Slowing Inflation Doesn’t Hasten Interest Rate Cuts, Homeowners Hopeful for Lower Mortgage Rates in 2025

Date Published: 23 April 2024

Key Facts

• The CPI inflation rate dropped to 4% in Q1 2024, a slight decrease from last year’s 4.7% but still above the 1-3% target range.
• Despite inflation concerns, the Official Cash Rate (OCR) looks set to stay put, with further cuts potentially delayed until 2025. This retains some pressure on mortgage rates.
• 56% of new loans were fixed short-term in February, up from 36% in December, indicating anticipation of future rate cuts among borrowers.
• While net migration to New Zealand has slowed, it remains strong overall, contributing to robust property demand.
• The New Zealand Activity Index suggests tentative economic recovery in Q1 2024, predicting a possible GDP growth of 0.5%.
• Despite modest improvements, access to low deposit finance remains limited, with prospective loosening of Loan-to-Value Ratio (LVR) rules anticipated in the coming months.

Article Summary

Despite significant economic news last week revealing a drop in New Zealand’s inflation rate to 4% for Q1 2024, this figure remains above the intended 1-3% target range. Tradable and imported inflation, reflected in petrol prices, stands at a modest 1.6%, while non-tradable or domestic inflation, influenced by rents, council rates, and house-building costs, remains high at 5.8%. This has led to expectations that the Official Cash Rate (OCR) will stay constant, with any potential cuts delayed until 2025. Mortgage rates continue to hinge largely on the OCR, and significant reductions are more likely a story for the next year.

While uncertainty persists regarding when mortgage rates might start to fall more drastically, borrowers have demonstrated their anticipation of imminent rate cuts by increasingly opting for short-term fixed rate loans. Reserve Bank data reveals that 56% of new loans in February were of this short-term nature, a sharp rise from 36% in December. However, this strategy comes with present-day costs as one-year fixed rates run 0.6% higher than longer-term rate deals.

Meanwhile, the strength of New Zealand’s net migration contributes to a high property demand, especially noted in rental properties within major urban centres. On the economic front, the New Zealand Activity Index indicates a possible upswing in the economy within Q1 2024, with potential GDP growth predicted around 0.5%. The economic recovery is a slow process, with significant struggles still evident.

Despite the slow recovery of the economy, prospective home buyers may anticipate a loosening of Loan-to-Value Ratio (LVR) rules in the coming months. March’s aggregated mortgage lending data will provide further insights into the current state of finance accessibility.

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