Interest rates are officially on the up again, with the Reserve Bank (RBNZ) increasing the Official Cash Rate (OCR) from 2.25% to 2.50% on 8 July.
The RBNZ’s associated commentary—which was unusually detailed for an interim statement, and (hike aside) decidedly doveish in tone—highlighted the complex range of factors that played into the decision.
1. The state of inflation
On the inflation front, while near-term pressures have eased (thanks to the partial reopening of the Strait of Hormuz and falling oil prices), there’s a question mark over how things will play out in the medium term.
In other words, the tail on this thing (e.g. the flow on effect of high oil prices to construction and agri costs) is going to take a while to work its way through the system.
The RBNZ expects inflation to peak at 3.9% in June 2026 quarter (i.e. now—official stats due out next week) and gradually head back towards the midpoint of its 1-3% target range by mid next year.
This hike is basically designed to make sure inflation stays on the right (i.e. downwards) track.
2. The state of the economy
Whilst things are still weak overall, the RBNZ is anticipating our economic recovery will start to gain more traction over the next six months.
It doesn’t want to take interest rate hikes too far, too quickly, and risk stamping that out. But equally, it also doesn’t want to end up in a scenario where, once demand starts to pick up again, any of that lingering inflation has the chance to get more embedded—which is when it becomes a real concern.
So far, weak demand has stopped businesses passing on higher costs (i.e. through price increases) and forced them to absorb the hit instead. As demand returns, and spare capacity in the economy starts to be absorbed, that could change—and the RBNZ wants to head that off at the pass.
3. The state of interest rates
Wholesale rates spiked sharply following the outbreak of the Middle East conflict, dragging mortgage rates up with them.
Essentially, that means the market’s done a lot of the heavy lifting for the RBNZ, tightening monetary conditions pre-emptively, without the need for increases to the OCR.
But wholesale rates have started to ease in recent weeks as the Middle East crisis (and oil shortage) has cooled. This week’s decision from the RBNZ is a signal that, while it doesn’t want mortgage rates climbing further at this stage, it doesn’t want them to come down either.
If it had been up to me, I would have held the OCR at 2.25% today—but rate increases were always coming eventually.
Looking at the picture across the economy—while there are exceptions, of course (with the rural sector in particular doing really well)—things are still weak overall.
And I can’t see much that’s going to change that until we’re out the other side of the election (and the uncertainty that always creates) and job growth has started to kick in again.
The good news is that we’ve already done most of the hard work to get the economy back on track, and the pain that came with it in terms of higher interest rates—arguably a bit overdone—has been largely absorbed. The medicine’s been taken.
All things being equal, I’m picking next year will be when we start to get our mojo back.
A brief note on what’s happening in the housing market
Not something I usually touch on in these updates—but the new high net worth (a.k.a. golden) visa is kind of interesting in terms of what it could mean for our economic recovery.
It only launched in March, but as of late May had already attracted over 700 applications (representing over $4 billion in capital), with the key requirement being buying or building property in the $5 million plus bracket.
Where they’re going to find all those houses, I don’t know—but if nothing else, it’s going to put a bit of a rocket under the top end of the housing market.
House price falls over the last few years haven’t hit all parts of the market equally. They’ve been bigger at the top end, less dramatic at the entry-level end—as you’d expect—but those high end falls have dragged average prices down across the board.
In theory, this new wave of high-net-worth buyers coming in should have the opposite effect, and could mean we see a reasonable level of house price appreciation at the top end of the market next year—helping to lift the rest of the housing market up with it.
To be clear, I’m not saying house prices are about to take off, but it may just help lay the foundations for a recovery. Once we’ve got that, and some decent job growth, that should bring a positive shift in consumer confidence along with it.
What’s the outlook on the OCR and interest rates from here?
Yes, rates are officially on the up again—but it’s nothing to freak out about.
We’ve been in a stimulatory rate environment for a while now—and it was always the case that, once the economy started to show signs of life, we’d eventually transition back to a more ‘neutral’ setting. That’s all this is.
The RBNZ has said that there will be further OCR increases to come, potentially before the end of this year, but timings will (as always) be heavily dependent on how inflation data plays out, and how quickly spare capacity in the economy gets absorbed.
With the estimated ‘neutral’ OCR currently at 3.00%, we can expect two more small hikes over the next few months—likely with the goal of getting us back to ‘neutral’ by mid-2027.
The thing that should give borrowers comfort in all this is that those increases are already largely priced into wholesale rates in market.
Once the OCR gets back to 3%, one- and two-year fixed mortgage rates should settle somewhere between 4.8% and 5.3%, which isn’t far off where they are already.
This isn’t a case of rates heading back up toward 7%. There’s just no real inflationary pressure out there to justify that kind of move.
As always, in a shifting rate environment, it’s worth having a chat with an expert mortgage broker about the right strategy for your situation — particularly given rate rises, however modest, are still on the cards over the next year.
What's the bottom line to this week's OCR decision?
In short: borrowers shouldn’t be too worried by this week’s OCR verdict—or the prospect of further increases to come over the next few months.
The rate hikes that are coming should be gradual and well sign-posted, and even once the OCR is back at a neutral setting, mortgage rates are unlikely to be much beyond where they’re sitting today.
About the author: John Bolton (JB), Squirrel Founder & Group Head of Property Finance