Interest rates: How far have they actually fallen? How much lower can they go?

The five-year rate from ASB, BNZ and Westpac has fallen to 5.69 per cent from a high of 6.75 per cent early last year.

BNZ chief economist Mike Jones said six-month and one-year rates were falling more slowly because they factored in smaller expected future rate cuts.

“Interest rates will continue to fall, but they may not come as slowly as before. The Reserve Bank caught some people off guard (with its rate cut in August), so people are rushing to factor that into interest rates,” Jones said.

He said rates will continue to fall, but not as much as they have been doing over the past month and a half.

Infometrics chief forecaster Gareth Kiernan said interest rates could fall by as much as 30 basis points over two years.

“Although I don’t expect that to happen any time soon. The most likely further significant rate cuts before the end of the year would be at the six and 12 month rates, which would be more sensitive to any further OCR cuts, weaker economic data or dovish rhetoric from the Reserve Bank,” Kiernan said.

As the OCR falls further, financial markets try to get a clearer picture of where the bottom of the OCR is in this easing cycle, and in particular whether it is below the level recommended by the Reserve Bank, the likelihood of further falls in the 18-month and two-year rates may become greater by 2025.

He said demand for housing loans was also a factor influencing loan rates.

“If housing market activity continues to be limited then banks will continue to compete to try to meet their lending targets, putting downward pressure on retail mortgage rates that may not be explained by wholesale rate movements.”

Kiwibank economist Sabrina Delgado said the two-year swap rate, which banks use to hedge two-year mortgages, was at 3.94 per cent, compared with a peak of 5.81 per cent.

“This has largely driven the downward movement in retail rates, particularly ahead of the RBNZ rate cuts. As the RBNZ cuts rates, we expect the two-year swap rate to fall – and retail rates to follow. We expect the two-year swap rate to fall below 3% by the end of next year and into 2026… We expect retail rates to be close to 5%, and possibly higher, depending on how far term deposit rates fall.”

– Royal Bank of New Zealand