Are We There Yet - When will interest rates bottom out?

The banks have come out with sub 4% “spring specials” but will it last?

To answer this question, you need to differentiate between floating and fixed interest rates.

Floating rates are influenced by what the Reserve Bank does with the Official Cash Rate (OCR), whilst fixed rates which are the most popular in NZ, are influenced by the OCR and what happens in overseas markets, particularly the US.

The outlook for the OCR, which has been unchanged for 2 years, is dependent on how the Reserve Bank sees the NZ economy going. It’s a 50/50 call which way the OCR will go this side of 2020 as inflation is higher than expected, business sentiment is low, economic growth is better than expected, unemployment is at record lows.

In the US interest rates have been rising and further increases are expected. This is due in part to the rising US Govt deficit due to tax cuts and increased Govt expenditure under President Trump. This deficit needs to be funded and this increases interest rates.

My best guess is that we are near or very near the bottom of the cycle. Once the spring specials end, which will be in the next few weeks, rates will be back above 4% which the possible exception of a 1 year fixed rate.