David Hargreaves looks at where the Official Cash Rate might go, what that means for mortgage holders and will it give a stuttering economic recovery fresh life?

So, an Official Cash Rate of 2.5% by October?

That’s what the economists at the country’s largest bank (and largest mortgage provider) ANZ are now saying.

If that is to be the case it will mean the OCR being cut much more (about 75 basis points more) than the Reserve Bank (RBNZ) indicated in its most recent Monetary Policy Statement in February.

A lot has happened since February, which means the RBNZ’s next MPS due out on May 28 will be watched with perhaps even greater interest the usual. The key question is: Will the RBNZ now also be suggesting a somewhat lower finishing point for the OCR in this cycle? If it does that's a green light for more mortgage cuts.

At time of writing (and bear in mind that things in the markets are moving very quickly), the financial markets were pricing in about 25% chance that the OCR will be 2.5% by October. So, to flip that around, there’s a greater chance seen at the moment that the OCR will be 2.75% at that time. Either way, the pricing has been dropping, so, don’t be surprised, particularly now ANZ’s had it’s say, to see that pricing start to converge on a 2.5% OCR for October in coming days.

At the moment the OCR is on 3.5%, having been dropped from the peak of 5.5% since August.

So, another whole 100 basis points of cuts over the next six or so months would have quite an impact.

Machinations of the mortgage market

And what are the country’s mortgage holders to make of it all? 

From the start of 2024 when it became apparent that inflation (having soared to a 7.3% annual rate in mid-2022) was being reined in, (it's 2.5% as of March quarter 2025) those with mortgages started to go very ‘short’ with their fixed terms. Very sensible. It meant of course they stood to get the best rate possible as quickly as possible when rates started coming down.

We are now in the middle of a great (mortgage) reset.

As at the end of February (latest RBNZ figures available), this was some of the key data:

The country’s total mortgage pile was $372.154 billion.

• 13.6% of this was on floating rates.
• 19.2% was fixed for up to three months.
• 23% was fixed for greater than three months, but up to six months.
• 26.9% was fixed for greater than six months and up to one year.

Okay, so, 32.8% of the total mortgage book (13.6% + 19.2%)  was either floating or fixed and due for a reset in three months (IE by the end of May). That’s a lot. It’s about $122 billion worth of mortgages.

The total either floating or fixed for up to (and including) six months was 55.8% of the mortgage pile. So, that’s about (and this includes the three month figures as well) $207.6 billion worth of mortgages either floating or to be reset by August.

Big numbers, big decisions

And then if we look at all the mortgages either floating or due for a reset in one year (IE by February 2026) then the grand sum up for a reset was 82.7%, which is around $307.7 billion worth of mortgages.

It all adds up to a lot of people having to make decisions on what new terms and rates to go for. And soon.

And, dare I say, with the economists now actively talking down the levels at which the OCR may bottom out at, then this decision making has got harder than it already was.

The banks had been pushing 4.99% two-year rates as the lowest on the market - and that was definitely starting to turn heads. But clearly, two schools of thought had formed - those who were prepared to wait and see if rates would get markedly lower yet, and those who thought we maybe getting close to the bottom.

RBNZ figures for the month of February showed that large numbers of mortgage holders have actually parked their mortgages on floating rates. That's one end of the school of thinking.

But at the other end of the thinking, the two year fixed rates had made a big come back and we will likely see that further reflected in the March figures when those come out.

However, with a wider range of mortgage offers now tipping under 5%, those (many) people having to decide soon which way to jump will be forgiven for having very conflicting thoughts. Clearly it’s a ‘nice’ dilemma to have given that the rates are coming down now, but clearly also a lot of people won’t want to pay any more in terms of a rate than they have to. And right now it is difficult to see what a 'right' decision is.

What rate is right?

You can ‘wait’ as some who’ve moved to floating already are, but there’s a cost to that.

So, when will we get greater clarity? And how low will mortgage rates go?

Clearly banks don’t want to go much lower than they are at the moment - hence the number of ‘tweaks’ we are seeing to rate rather than chunky downward moves. The banks appeared to have squeezed their margins as far as they are prepared to.

What the banks will want is to have a definite picture that the RBNZ will lower the OCR below 3% - and then they will feel freed up to drop rates somewhat more aggressively.

So, obviously it’s in the banks’ interests to see the OCR continuing to come down.

Personally, and don't hold me to this, I've always had a gut feeling we are likely to see rates at least as low as 4.25% this year - though the banks as you might expect have not been talking as low as that. With a much lower OCR, however...

But what will the RBNZ think?

There’s some conflicting signs in the economy. We saw a big bounce back in business and consumer confidence surveys towards the end of last year. But a lot of that always could have been seen as relief following the first OCR cut in August - which was only three months after the RBNZ had issued a very ‘hawkish’ statement suggesting no cuts for quite some time.

Shaky recovery

So far though, the relief sentiment hasn’t been convincingly backed up by the sorts of things we would want to see, such as businesses investing more and taking on more staff, or by consumers spending more. In fact, the 'recovery' still looks shaky.

Spending figures have stalled again and the services sector, which makes up about two-thirds of GDP - is still in contractionary mode, according to the BNZ-Business NZ Performance of Services Index.

So, while people have maybe felt a bit better  because interest rates are going down, they are still wary and being careful with their money.  And remember, the unemployment rate is now 5.1%. Economists see that as probably somewhere near the top - but equally they aren’t forecasting the rate to come down quickly. So concern about job prospects is another reason for caution.

And then on the global stage there’s been ‘trouble’ with a capital T. That’s as in T for Trump and T for Tariffs. And T for Turmoil, if you want.

So, we had some expressed relief late last year as rates started to come down. But now we've gone back into a very cautious mode. 

There’s no doubt that the mood of our nation tends to be better and more confident when we have a housing market that’s buoyant. Clearly the banks would like to see that too because that would be good for their mortgage business. And our banks have increasingly centred themselves around residential mortgage business.

The housing market is recovering from where it was, but still appears to have indigestion from that remarkable pandemic binge of 2020-21.

Housing market Indigestion remains

The key thing for me from the latest REINZ monthly house sales data was the fact that the inventory of for-sale listings grew another 3.2% in March. Till that starts shrinking, house prices, which dropped 0.7% in the 12 months to March (according to REINZ's House Price Index), aren’t going to start rising meaningfully.

In February the RBNZ pared back its house price forecast for the 2025 calendar year to 3.8% from 7.1% previously. ANZ has now just dropped its forecast from 6% to 4.5%.

A big question at the time the OCR started coming down was just how quickly the economy could be revived by lower interest rates - having been knocked into recession by elevated rates. I think we are finding out that the answer is ‘not as fast as might have been hoped’.

The RBNZ has got to work out whether the economy, with all the global uncertainty thrown in as well, will recover fast enough and whether taking the OCR down further - and perhaps faster with another 50 point cut - will be the answer. The OCR cuts we've had already should be enough to revive the economy over time. Whether that's all happening fast enough and whether deeper cuts will help is something the RBNZ needs to work through.

It's a very uncertain time, whether you are fixing a mortgage, considering buying a house, worried about job stability, or just wondering where the current global instability will take us.

Many questions. Not too many ready answers just at the moment. Maybe simple patience is the best thing.