Inflation fallout: Are interest rate cuts now off the table until 2025?

• Published date: 26 April 2024
• Author: Kelvin DavidsonKelvin Davidson is CoreLogic chief economist
• Publication title: Horowhenua Chronicle

1. Inflation hasn’t disappeared just yet

The major piece of economic news last week was the headline CPI inflation rate dropping to 4 per cent in Q1 2024, down from 4.7 per cent in Q4 2023, and roughly in line with what was expected by both the Reserve Bank and private sector economists. So far, so good.

However, that’s still above the 1-3 per cent target range, and the breakdown was a bit concerning.

In particular, tradable/imported inflation (eg. petrol prices) is doing the work at present, coming in at 1.6 per cent for Q1.

By contrast, the non-tradable/domestic figure was stuck at 5.8 per cent, reflecting pricing pressure from things like rents, council rates and house-building costs.

Overall, then, the central scenario remains the same; Official Cash Rate rises are off the table, but cuts won’t be seen imminently either, and if anything, the timing for that first drop might just have pushed back slightly into 2025. The OCR isn’t the only determinant of mortgage rates, but meaningful drops in the latter are probably still a story for next year not this.

2. We’re all betting on falling mortgage rates

But even though there’s still a lot of uncertainty about when mortgage rates might actually start to drop more significantly, borrowers are nevertheless voting with their feet and opting for short-term fixed rate loans, of up to one year.

Reserve Bank data shows that, by value, 56 per cent of new loans were ‘fixed short’ in February, up sharply from just 36 per cent in December.

This signals that borrowers are anticipating rate cuts (at some stage), and hence aren’t wanting to lock in for too long.

Of course, that comes at a cost now, with one-year fixed rates about 0.6 per cent higher than, say, three-year rates. Unfortunately, nobody has a crystal ball, and we only know the best strategy in hindsight.

3. Net migration remains strong

It’s pretty clear that migration flows into NZ in net terms have passed their...