Two-year swap rates, which can influence mortgage rates, currently trade at around 5.075 per cent, down sharply from 5.785 per cent in early October.
Further out, the 10-year swap rate - which is more influenced by overseas markets - has dropped to 4.80 per cent from 5.43 per cent in late October.
The shape of the yield curve - often viewed as a window into where the economy is - is now less “inverse”, with short rates being higher than long rates, than it was at the start of the year.
There are now just 35 basis points separating the two-year and 10-year swap rates, compared to around 100 basis points earlier in the year.
“If the market is right, by this time next year, mortgage rates could be 50, 100 or 150 basis points below where they are now,” Kiwibank chief economist Jarrod Kerr told the Herald.
“We are at a really critical point right now.
“The key point for mortgage holders is that rates will be heading lower over the next year,” Kerr said.
The Reserve Bank has its official cash rate (OCR) set at 5.5 per cent, and current market pricing suggests rate cuts could start as early as mid-2024.
“That’s a massive swing from the market having priced in a full rate hike by February next year,” Kerr said.
“We have seen that short end of the curve completely repriced, and it’s been quite a big shift.”
The downward move in wholesale rates has been driven by a string of data suggesting the economy is cooling and inflation is closer to being contained.
A weaker Quarterly Survey of Business Opinion, soft labour data and a lower-than-expected CPI of 5.6 per cent for the year to September would have been good news for the Reserve Bank as it tries to cram inflation back within its desired 1 to 3 per cent annual range.
“It’s all feeding through to the Reserve Bank’s [rate hikes] being done, and the next move being a rate cut,” Kerr said.
Harbour Asset Management fixed income and currency strategist Hamish Pepper said the falls in wholesale rates should flow through into mortgage rates soon.
Recent soft data suggested the Reserve Bank’s rate hikes - which have taken the OCR from 1.0 per cent in February 2022 to 5.5 per cent today - suggest the bank’s moves were having their desired effect in terms of slowing the economy down.
“All of a sudden, we have more evidence that monetary policy is working in New Zealand, and to a degree, overseas as well,” Pepper said.
As it stands, the market is pricing in some chance of a rate cut by April or May, with the odds increasing as the 2024 year progresses.
Pepper said there was already justification for mortgage rate cuts, going on the wholesale market’s latest moves.
“There is justification for it, and it’s probably going to be about how much they [the banks] want to attract new lending in that space,” Pepper said.
“What the market is saying is that we have seen peak interest rates - whether it’s wholesale or retail.
“It’s a real turning point, which reflects where we are in the cycle,” Pepper said.
Pepper said the economy was showing signs it was hurting from high interest rates.
It remained to be seen just how much banks would respond to the reduction in wholesale interest rates.
“For now, wholesale rates have moved a lot more but retail rates have not moved at all, so that transmission is not really there,” he said.
Overseas markets have delivered similar messages along the lines that central banks may be over the inflation hump.
“The talk around the Fed, and other central banks, has shifted from more hikes to potentially those banks being done,” Kiwibank’s Kerr said.
At its last monetary policy statement, the Reserve Bank pointed to its OCR starting to turn lower by late next year.
Attention will now be focused on any changes to the bank’s OCR track when it publishes its Monetary Policy Statement next week.
Jamie Gray is an Auckland-based journalist covering the financial markets and the primary sector. He joined the Herald in 2011.