New year, new interest rates?

That’s what most mortgage holders are hoping for anyway!

But, will it actually happen?

Let’s take a look at what’s been happening in the world of finance and property over summer and what the economists think will happen to interest rates in 2024 – the 12 months ahead.

Inflation

On 24 January, the new inflation figures were released. Currently, inflation is sitting at 4.7%. This is down from a peak of 7.3% in June 2022, but still outside the Reserve Bank’s targeted window of 1-3%. However, they had forecasted an inflation rate of 5% for this quarter, so there is evidence that the measures put in place to tame inflation have been working.

For the fourth consecutive month, food prices have decreased with a 0.1% fall in December 2023. It is hoped that annual food price inflation should fall below 3% by mid-2024 bringing some much-needed release to household grocery budgets. The prices of petrol, accommodation, tobacco and alcohol also eased in December, which was part of what helped inflation track downwards.

Senior economist Mark Smith has noted that the Reserve Bank will still be wary about the risk of inflation being stuck above their target of 3%. They are likely to maintain the OCR at a restrictive level for as long as it takes for inflation to sit below their 3% target on a sustained basis.

OCR

Right, so inflation is tracking down, does that mean we will see a reduction in the OCR? As we know, the OCR is a key determining factor in setting mortgage interest rates.

So, will the OCR go down? The answer is yes, but the rate cuts might not be as soon as we’d hoped.

The facts are that economists believe it won’t be long until we see the Reserve Bank switch from fighting inflation to reviving demand. There was even talk that the positive impact of the monetary tightening tactics implemented by the Reserve Bank was working well enough that we might see a cut in the first quarter of this year.

However, the big five banks are less optimistic about that happening. ANZ and Westpac are predicting no OCR cuts until February 2025, but that mortgage rate cuts could be seen earlier. ASB is predicting the first OCR cut in August 2024 and BNZ has a similar opinion, that the OCR will be cut in the third quarter of 2024. Kiwibank believes the OCR rate cut will take place in November. [source]

The Reserve Bank itself has not given any indication of when cuts might take place. And they are unlikely to give any warning for fear it might trigger backward progress on the good results they are achieving with inflation. However, inflation is not the sole consideration. They do not want to hold out too long, risking the economy falling into a state where significant stimulus will be needed to revive it. [source] It is a unique balancing act!

We can take comfort that across the board, OCR rate cuts are on their way. The only thing that is unclear right now is when these cuts will happen. We’ll keep you updated on what’s happening in the market on a monthly basis. If you haven’t already done so,   to receive the latest news straight to your inbox.

Property Market

The bottom kind of fell out of the property market in 2023, so what does 2024 look like?

The predictions are that the market will recover, but prices are not going to soar like they did in 2020 and 2021. Experts are expecting a small amount of growth in 2024.

They also believe that people are ready to buy and sell again. “Not because it’s boom and not because we’ve got past the bust, but the fact that it will be normal. We’ll see normal transactions, we’ll see stability in prices.” [source]

In the current market, things are quite predictable on the lending front. Borrowing is down, and with interest rates still showing no real signs of mercy, it is no surprise that shorter fixed terms are being favoured right now. [source]

Interest Rates

So, what does all this mean for interest rates in 2024?

Well, for a start, there is a bit of good news. Banks are currently more willing to negotiate and offer discounts in order to secure or retain customers. We are starting to experience that “there are big differences between what the banks’ advertised rates are and what can be negotiated” [source] This is especially true if you have a good payment history and more than 20% equity in your property.

In saying this, there seems to be more scope for negotiation on the longer term rates – 3, 4 and 5 year fixed terms – and less on the shorter term rates. The question is, are they hoping to tempt customers with a longer term fixed rate, knowing that all rates are predicted to come down in the not-too-distant future?

Late 2023 also had some encouraging signs with longer term interest rates being trimmed modestly. This was largely a result of international wholesale rates dropping by more than 100 basis points.

Whether short and long term fixed rates will drop in 2024 will be determined by inflation, wholesale rates and the OCR. It is expected that interest rates in 2024 will trend downward, the only question is when that will happen.

The best advice we can give you is to get in touch with a reliable mortgage broker, like the team here at Mortgage Suite, before making any major decisions this year. That includes buying and selling property, but also refixing current interest rates. So, drop our team a line, we’d love to hear from you!