There is no doubt that the OCR will continue to decrease, but 2025 decisions will be about the speed and depth of this. The NZ economy has continued to flatten. Adjusting for inflation and population growth, the economy has been flat or in decline for most of the last two years. Inflation is largely under control. Imported “tradable” inflation is well down. Some domestic inflation numbers have remained a bit “sticky”, but the weak labour market is taking the heat out of wage pressures. Most economists expect the OCR to track towards a “neutral” rate in 2025. Depending on who offers the opinion, this may range from 2.5% to 3.5%, which means OCR cuts still have about 1.0% to 1.50% to run.

Caution is needed for business borrowers though, as this is not all a one-way street. Floating & short-term borrowing rates (up to two-year fixed rates) will largely track the OCR downwards, and this will apply to both residential mortgages and business lending. Borrowers on floating rates are currently paying a premium compared to fixed rates available in recent times. However, they will see rate reductions through 2025.

The impact of the OCR cut on fixed rates longer than three years is minor. Rate reductions had already been well priced in by wholesale markets, and these markets are impacted more by international factors than domestic rate decisions. While longer term wholesale interest rates are significantly lower than there were at their peak in mid to late 2023, they bounced from late September through mid-November. Five-year swap rates increased by 0.55% between the 17th of September and 15th of November. They have since reversed about 0.25% of that increase. Market sentiment in international markets, primarily in the USA, is that the ability of larger central banks to cut as far and as fast as predicted mid-2024 has waned. This is partially due to the US economy growing well, but also on expectations (and uncertainty) about how inflationary Trump's economic policies may prove to be, particularly if tariffs interrupt international trade flows. Business borrowers seeking long-term fixed rates, widely used in the asset finance market, should not expect these rates to fall further in the short term.

The chart below shows five year swap rate changes since November 2023 (source – interest.co.nz and NZFMA)