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Welcome back to our very first market update of 2025.
We’re just a few short weeks into the year, but already—with Trump now back in the White House, and our next OCR announcement coming up on 19 February—there’s a whole lot to unpack.
So, here’s the latest on interest rates, the housing market, and both the New Zealand and global economies over the last month or so.
Let’s start with the latest big global economic news: Trump’s new trade tariffs
After threatening the move in November, President Trump last week announced his plan to impose hefty new tariffs on the USA’s three largest trade partners, Canada, Mexico (both 25%) and China (10%) starting early February.
The tariffs are an aggressive and calculated power play from Trump, with two main goals in mind:
- Giving the US leverage over Canada and Mexico to secure greater support on border security and help stem the flow of illegal immigrants and drugs across the US border.
- Bringing greater levels of manufacturing back to the US, to the benefit of US workers and businesses.
And on that first point, I have to say it’s been pretty effective so far.
At first looking as though the tariffs might kick off a full-blown trade war—with Canada and Mexico threatening to introduce their own tariffs in response—tensions have simmered in the last few days.
While tariffs on China went ahead as planned on 4 February, both US neighbours have now agreed to come to the table on border security, with Trump pausing tariffs for 30 days pending further negotiations.
The bad news is that Trump is now toying with the idea of adding EU tariffs to the mix sometime soon as well.
So, the crisis has been largely averted for now—but there are major concerns about what these additional tariffs could mean for global economic growth and inflation if they do come into effect
It’s that old saying… When America sneezes, the world catches a cold.
While US consumers will bear the brunt of the impact, the intended tariffs will significantly effect the rest of the global economy.
Cost increases in the US—due to the tariffs themselves, and the return of manufacturing to the higher-cost US economy—will increase domestic inflation.
That will force the Fed to keep interest rates higher for longer, which will translate to a stronger US dollar, and a weaker currency for New Zealand and other trade partners. In turn, this will have an inflationary effect on the rest of the world.
What does it all mean for New Zealand?
The fact that most of our key trading partners would be in the same boat, facing a weak currency against the US dollar, should help to offset any major inflationary impact for New Zealand.
China’s economy in particular—as our key trading partner—is in a pretty weak (bordering on deflationary) state.
All of that should mean the impact of a higher US dollar will be fairly limited, unless it hits oil prices, and I think Trump is going to be careful on that front.
What’s in store for our next Official Cash Rate (OCR) announcement coming up on 19 February?
This is the first time we've heard from the Reserve Bank (RBNZ) since before our latest GDP figures were released in December—which (if you’ve managed to forget) were pretty dismal.
The expectation is that the RBNZ will stay the course it laid out for us last year, pushing through another 0.50% decrease on 19 February, from 4.25% down to 3.75%.
The RBNZ is also due to share an updated OCR forecast for the rest of the year, which I expect will show it making moves to get us back to a neutral OCR of around 3% as quickly as possible.
If we do get the expected 0.50% drop this time, that means we’ll only have another 0.75% to go. I’m picking that we’ll reach that ‘neutral’ point sometime around the middle of the year.
What does that mean for interest rates and mortgage borrowers?
If you’ve got a loan maturing in the few weeks, I’d suggest just letting it roll onto a floating rate (which happens automatically if you don’t refix) and stick there until at least early March, when OCR changes should have flowed through to bank rates.
If you wanted to fix at that point, the recommendation would be to go short-term, for six months or a year.
Otherwise, depending on your situation, you might choose to camp out on a floating rate for a bit longer, until we're regularly seeing rates below 5%. (Westpac has just moved to a three-year rate of 4.99%, which I have to say is pretty damn attractive!)
Other banks will be reluctant to follow but will negotiate, and I expect to see them move following the next OCR change.
At a ‘neutral’ OCR of around 3%, mortgage rates should settle somewhere between 4.5% and 5%. The COVID days of 2% to 3% are well behind us—at least for now—and so borrowers need to have reasonable expectations moving forward.
And finally, let’s touch on what’s been happening in the housing market
With headlines like this one doing the rounds, it’s clear that the housing market is a long way from its peak.
And the fact is that, right now, many of the tailwinds we’d need to drive solid house price growth—like high levels of immigration and rising employment—just aren’t there.
Our economy is still weak, confidence is down, and interest rates are still comparatively high even with the OCR cuts we've had to date.
Right now, people are just working on trying to rebuild their finances after the last couple of years—they’re not going to be going out and spending big (especially if it involves committing to extra debt).
Even though our recovery is likely to be slow and bumpy, we are headed in the right direction. Things should start to feel more positive for many of us over the course of this year, setting us up for a much better 2026.