The “rates will stay higher for longer” mentality that saw interest rates increase through 2022 & 2023 began to shift in late 2023. This was driven more by international markets than by New Zealand’s Reserve Bank. Markets like the USA became more comfortable that their inflation numbers were under control. The impact for us was therefore more on longer term fixed rates rather than short term or floating interest rates, as our long term wholesale rates are impacted more by international trends. From early November 2023 financial markets begun to price in rate reductions during 2024. For example, we saw five-year fixed rates for asset finance fall close 0.75% between November and early January, though they have reversed some of those reductions through January & February.

So, what does this mean for business borrowers?

1. Large Interest Rate rises during 2024 are unlikely. Some increase in the OCR during early 2024 cannot be ruled out as economic data from early February has been better than most commentators expected. However, almost all economic commentators expect rates to move downwards for both New Zealand and international markets from late 2024.
2. We are likely to see some interest rate reductions in 2024. The big questions are “how much” and “when”. At a local level, the Reserve Bank is currently taking a hawkish tone, talking down expectations of reductions in the Official Cash Rate. Inflation pressures in New Zealand are moderating but remain well outside the target band within which the RBNZ must operate. Commentary by the RBNZ chief economist made in late January, reinforces this tone. In contrast, during its 31st of January meeting the US Fed indicated that their next move will be downwards, but downplayed expectations that it would cut them soon. The Fed’s Chair made clear that while they had six months of good data showing moderating inflation, they wanted to see further progress before cutting rates. Financial markets currently price in expectations of reductions during 2024 but most commentary expect these rate reductions to be modest, and later in the calendar year. We are likely to see international markets move first, with the RBNZ holding out longer as inflation pressures remain higher in New Zealand. Better than expected employment data released on February 7th reinforce the view that local rate cuts are likely to be modest and late into 2024.
3. It is highly unlikely that interest rates will fall to the very low levels that we saw across the globe in 2020 and 2021. Most economic commentators agree that with the benefit of hindsight both monetary and fiscal policies were too loose across the globe, helping to create the inflationary bubble central banks are currently working to squash. Don’t base your business assumptions on seeing rates returning to 2021 levels!