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Private property issue #69 - Latest interest rate predictions

Inflation has fallen to 6%. Stats NZ released the new inflation figures yesterday morning. But what does it mean for your mortgage interest rate?


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Inflation has fallen to 6%. Stats NZ released the new inflation figures yesterday morning.

But what does it mean for your mortgage interest rate?

Will interest rates finally come down?

Interest rates are high because inflation is high.

Inflation peaked 12 months ago at 7.3%.

So, falling to 6% means that inflation is heading in the right direction.

But that doesn't mean the 1-year mortgage interest rate will tumble tomorrow.

The Reserve Bank's job is to keep inflation between 1 and 3%.

Yesterday's numbers showed that inflation is heading in the right direction. But it is still well outside that target band.

So, the Reserve Bank will need to keep the squeeze on interest rates until we get inflation close to or under 3%.

What will interest rates do over the next 12 months?

ANZ forecasts that the 1-year interest rate will stay high throughout this year.

They predict a peak of 7.1% before it falls to 6% by the end of next year.

We should take their forecasts with more than a grain of salt. After all, they (and other banks) are the ones who set the interest rates.

But remember that each interest rate peaks at different times. In last week's Private Property, I shared this graph.

It shows that the 5-year interest rate peaked back in January 2023. The 1-year rate is probably at its peak now.

Expect inflation to keep dropping

Expect inflation to be way lower the next time Stats NZ releases its inflation data.

When we say "inflation is 6%," we mean annual inflation is 6%.

But Stats NZ also releases inflation data spaced over quarters.

See how September 2022 was an expensive quarter? Prices went up by 2.2% in just 3 months. In the following 3 quarters, inflation has been lower.

That high-inflation quarter is counted in yesterday's 6% annual inflation figure.

But it won't be included in the calculation the next time Stats NZ releases inflation data.

If inflation continues as it has for the last 9 months, then inflation will drop by a lot.

The banks agree. Most say that inflation will be back within the Reserve Bank's target band by the end of next year.

That's why we've stuck with our current interest rate predictions –

What does it mean for house prices?

There have been four major news announcements that have happened over the last 9 days.

Every news story and data release points to recovery:

  • Net migration increased to 77,810 – Stats NZ (last Wednesday)
  • The OCR stopped going up, pausing at 5.5% – Reserve Bank (last Wednesday)
  • House prices rose 0.4% in June – REINZ (last Thursday)
  • Inflation dropped to 6%, down from 6.7% last quarter – Stats NZ (Yesterday)

Each news story will lead Kiwis to conclude that house price falls are over in many regions.

After 18 months of blow after blow, the bad news bulletins are ending, and the property market is turning.

ANZ predicts house prices will increase by 4.2% over the next 12 months. Tony Alexander says 5%. KiwiBank says 6%.

None of them will get it exactly right. But they're singing from the same hymn sheet.

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Andrew Nicol

Managing Director, 20+ Years' Experience Investing In Property, Author & Host

Andrew Nicol, Managing Director at Opes Partners, is a seasoned financial adviser and property investment expert with 20+ years of experience. With 40 investment properties, he hosts the Property Academy Podcast, co-authored 'Wealth Plan' with Ed Mcknight, and has helped 1,894 Kiwis achieve financial security through property investment.

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