New Zealand's wholesale interest rates have experienced a significant decline in the past month, indicating potential cuts in mortgage rates in the near future.
Two-year swap rates, the difference between what banks pay for money and what they charge consumers to borrow it, and very influential in determining mortgage rates, have dropped almost ¾ of a percent recently (5.785% to 5.075%).
The reason they have dropped is a result of global markets economic cooling and signs other countries are winning the inflation battle.
Normally short-term interest rates are lower than longer term but the yield curve, a gauge of economic conditions, is now inverted, with short-term rates higher than long-term rates…but not as much as it has been in the recent past.
This change could mean a possibility of mortgage rates decreasing by 50 to 150 basis points over the next year – happy days right! The Reserve Bank’s official cash rate (OCR) is sitting at 5.5% and they may consider rate cuts as early as mid-2024. This is different to the, not so long ago, thinking of a rate increase in February and potential cuts to the OCR late in 2024.
It could be that that interest rate increases we’ve experienced since Feb 2022 may have been too aggressive and central banks around the World may have to reduce rates earlier than thought to prevent deflation and stimulate their economies!
Let’s hope we don’t enter a period of flip-flopping rate changes because many people are looking for certainty. A period of relative stability will be nice…after a decent reduction in rates first, of course!
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