Interest rates: How far have they really fallen? And how low could they go?

The main banks have all trimmed their rates significantly since the Reserve Bank cut the Official Cash Rate earlier this month.

By Susan Edmunds of RNZ

Two-year mortgage rates have had the biggest falls, as banks move to cut what they charge borrowers.

The main banks have all trimmed their rates significantly since the Reserve Bank cut the Official Cash Rate (OCR) last month.

From a peak of about 7% late last year for two-year special home loan rates, according to Reserve Bank (RBNZ) data, on Friday all of the major banks had two-year specials below 6%. The cheapest advertised rates were 5.89% for two years at ASB and BNZ.

Six-month and one-year rates have fallen from a peak of about 7.3% in January to as low as 6.45% for a year at ASB, BNZ, Kiwibank and ANZ, and 6.85% for six months at ASB and BNZ.

The five-year rate has fallen from a peak of 6.75% early last year to 5.69% at ASB, BNZ and Westpac.

BNZ chief economist Mike Jones said six-month and one-year rates were slower to fall because they had fewer of the expected future interest rate cuts built in.

“Interest rates are going to keep falling but probably not at the same pace they have been. The Reserve Bank caught a few people on the hop [with the August rate cut] so there has been a bit of a rush to price that into rates,” Jones said.

He said rates would continue to fall, but not at the pace seen over the last month and a half.

Gareth Kiernan, chief forecaster at Infometrics, said there was scope for drops of up to 30 basis points across rates up to two years.

“Although I’m not necessarily expecting that to happen any time soon. Probably the biggest likelihood of further rate cuts to any significant degree before the end of this year would be for six-month and 12-month rates, which will be more sensitive to any further OCR cuts, weaker economic data, or dovish rhetoric from the Reserve Bank,” Kiernan said.

Further declines in 18-month and two-year rates would probably become more likely out into 2025, as further OCR cuts occur and financial markets try and get a clearer picture of where the bottom is for the OCR in this easing cycle and, in particular, whether it’s lower than what the Reserve Bank has suggested.

He said demand for home loans would also be a factor in the rates offered.

“If there continues to be limited activity in the housing market, then the banks will keep competing to try and meet their lending targets, maintaining downward pressure on retail mortgage rates that might not otherwise be justified by wholesale interest rate movements.”

Sabrina Delgado, an economist at Kiwibank, said the two-year swap rate, which banks use to hedge two-year mortgages, was at 3.94% – compared to a peak of 5.81%.

“That’s been a large part of the move to lower retail rates, especially prior to the RBNZ cut. As the RBNZ cuts we expect to see the two-year swap head lower – along with retail rates. We’re forecasting the two-year swap towards sub-3% into late next year and 2026... we expect to see retail rates move closer to closer to 5%, possibly higher depending on how far term deposit rates fall.”

- RNZ