Here's How Much Interest Rates Have Fallen

Monday, 10 March 2025, 9:25 pm
Article: RNZ

Susan Edmunds, Money Correspondent

The extent of interest rate falls can be seen in new data from the Reserve Bank.

Borrowers were getting special six-month home loan rates of 5.85 percent on average in February, down from a peak of 7.34 percent.

The one-year rate declined from virtually the same peak to 5.28 percent in February and the two-year rate dropped to 5.13 percent.

Most banks are now offering a two-year special of 4.99 percent.

Retail rates have fallen steadily as the official cash rate (OCR) has dropped from its peak of 5.5 percent to 3.75 percent.

ASB economists said markets had priced in another 25 bp cut in April and a further 20 bp in May.

"The RBNZ has explicitly signalled 25bp cuts in April and May and we don't expect that the resignation of Governor Orr will substantively change short-term monetary policy direction. There are both upside and downside risks to the medium-term inflation outlook, but the downside risks look to be the most persuasive with the risk that accommodative interest rates will be needed ... Much will depend on how persistent the likely mid-2025 inflation spike will be."

Simplicity chief economist Shamubeel Eaqub said the OCR cycle this time was different because of the very low OCR of the Covid period. "The last time we had a big hiking cycle as in the lead up to the GFC when we had mortgage rates in double digits."

He said the extent to which rates could fall further from here would not just come down to the OCR movement but how much banks were willing to reduce their margins, between the retail rate charged and wholesale swap rates.

Swap rates, which reflect the likely future track for the official cash rate, have fallen to a level that is now lower than government bond rates, which factor in other risks.

Westpac chief economist Kelly Eckhold said it had been that way for some time.

"This reflects the relatively high level of government bond issuance given the large fiscal deficit right now and the need for a premium to encourage investors to buy the bonds on offer," he said.

"The main implication is that the cost of funding for the government is a bit higher than might otherwise be the case - given we should expect on a relative risk basis that government bond yields should be below equivalent maturity swap rates."

He said it was a global issue. "European bond spreads have widened significantly in recent months as their fiscal needs have increased."

He said he did not expect significant further falls in swap rates because they already reflected the expected future track for the OCR.

"Having said that, global rates matter more the longer the maturity and developments there are quite fluid at this time. We would expect government bond rates to move in line with swap rates looking forward in any case."

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