Unwind incoming: How low will interest rates go?

The wholesale interest rate market is aggressively pricing in cuts to the Official Cash Rate this year, but an economic unwind will not be a return to the zero interest rate, cheap money era where house prices take off again.

“That period was the outlier and people need to keep that in mind,” JB Drax Honore Asia Pacific chief strategist Seán Keane told Markets with Madison.

“We don’t want to get back to zero [% Official Cash Rate]. Zero was not a good place to be.

“Central bankers certainly didn’t want to be there, because then you end up with all the unconventional monetary policy solutions. Of course we’re now trying to unwind all of the issues with that.”

The two-year swap rate - which influenced interest rates - recently hit a two-year low, according to Kiwibank economists, leading major banks to lower retail rates.

“The market is obviously running well ahead of them [the RBNZ], because what the market sees is that the economy is hitting a wall, unemployment’s going to go up very quickly, inflation’s gonna come down very quickly.”

In the past five years, the Official Cash Rate picked by the Reserve Bank monetary policy committee has gone from 1.75% in 2019, down to a record low 0.25% in 2020, then incrementally hiked up to 5.5% where it had stayed for more than a year.

The wholesale market was pricing the OCR would drop to a low of 3.75% over the next year.

Keane expected it would fall further than that, to between 3% and 3.25%.

“But there’s some risk that it could end up higher than that because as the world changes, and it is changing, we don’t know what’s going to happen with future trade agreements and the US view of how it wants to trade with the world.”

While the market was pricing in cuts to commence as soon as this month, Keane thought that was less likely.

His forecast was for a later, larger cut of 0.5% at the November RBNZ announcement.

While the headline rate of annual consumer price inflation was now 3.3% - down from the 7.3% seen in 2022 - it was not yet within comfort range, Keane said.

“It’s not just about getting to 2[%] and then bouncing off it, it’s about getting to 2 and staying there.”

Hear about the incoming economic unwind, and the gap between RBNZ and market pricing, on today’s episode of Markets with Madison above.

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Disclaimer: The information provided in this programme is of a general nature, and is not intended to be personalised financial advice. We encourage you to seek appropriate advice from a qualified professional to suit your individual circumstances.

Madison Reidy is host and executive producer of the NZ Herald’s investment show Markets with Madison. She joined the Herald in 2022 after working in investment, and has covered business and economics for television and radio broadcasters.