Interest Rate Forecast – Where Are Interest Rates Heading?

Last Updated: 16/06/22

LM b W

Laine Moger

Journalist and Property Educator for 6 Years
Introduction

There’s no missing it: Interest rates, like prices of everything else, are rising.

Why? Record low interest rates sent inflation soaring above the norm, which has forced the Reserve Bank to increase the OCR in an attempt to temper the economy. The knock-on effect for property investors is two-fold – more expensive mortgages, and the loss of cashflow from investment properties (compared with what otherwise would have been the case).

This could leave many investors wondering: “Where are interest rates going to go over the next few years?”

So, in this article you’ll discover our forecast for where interest rates are going, so you can make decisions around your property portfolio.

What's Currently Going On?

What’s The Current Sitch?

Currently, interest rates are on the rise as they return back to more normal levels.

In 2021, New Zealanders saw record-low interest rates. The 1-year fixed mortgage rate slipped under 2.2% for a time, the lowest on record.

The Reserve Bank slashed the OCR and pumped money into the economy in a bid to help the country through the Covid-19 lockdowns.

But in doing this with a combination of supply constraints, a labour shortage and the war in Ukraine, the economy overheated. Demand is now outstripping supply and inflation has skyrocketed, sending the price of things much higher.

To bring it back down the Reserve Bank has raised the OCR to 2%, hiking interest rates to slow the speed of spending and let the pressure out of the economy. And there’s more to come.

nz mortgage interest rates forecast 2022 nz
What's Your Forecast?

So, What Is Your Forecast For Interest Rates?

Here at Opes we forecast the 1-year fixed mortgage interest rate will go as far as 5.75%, before levelling out to a long-term average of 4.5%.

Forecasts for interest rates take into account 3 things:

  • - The long-term average for interest rates
  • - The Reserve Bank’s OCR track
  • - Other relevant factors that impact both of the above

Let’s get into how we’ve come to these numbers.

interest rate predictions nz

The Long-Term Average Interest Rate

For any forecast about future interest rates, it’s a good idea to start with what has been the long-term average.

Why? Because when you’re trying to glimpse into the future, it's good to have a baseline for where interest rates have been in the past.

Over the last 10 years the 1-year fixed interest rate has been sitting at around 4.45%. This represents a “more normal” level of interest rates.

Today, the 10-year average sits slightly lower than this (4.34%), but 4.5% as a long-term rate is a good place to start.

Bear in mind it’s not a perfect forecast yardstick, but it’s a useful starting point to use as an assumption.

The other reason we tend to use 4.5% as a long-term assumed 1-year interest rate is that the Reserve Bank’s neutral OCR is about 2%.

That means when the central bank is neither trying to stimulate or contain the economy, the OCR will be around 2%.

On top of this, over the last 10 years there has been an average margin of 2.5% between the OCR and the 1-year fixed mortgage interest rate.

That means that if the OCR is 2%, the 1-year rate is about 2.5% above that. So, again 4.5% seems about right, although what will actually happen in practice is anyone’s guess.

interest rate predictions

Q: What is the OCR and how does it work?

A: The OCR is the interest rate the Reserve Bank has full control over. It’s set by the Reserve Bank and is tied to what the banks are charged for some of their short-term lending and borrowing.

The OCR influences other interest rates, which is how the Reserve Bank keeps the New Zealand economy stable.

Q: What is the official cash rate in New Zealand right now?

A: 2% (June 2022)

What Is The OCR? What Effect Does It Have On Interest Rates?

The OCR (official cash rate) is the Reserve Bank’s interest rate, which influences other interest rates.

In particular, a change in OCR has a large impact on short-term interest rates (like the 1-year fixed) and less impact on longer-term interest rates (like the 5-year fixed).

Looking back over the last 10 years, the average difference between the OCR and the 1-year fixed rate is about 2.5%. The pair follow suit through increases and dips over time.

Interest rates forecast

So, if the OCR is 2% (which it is currently), then the 1-year fixed interest rate is about 4.5%.

Where is the OCR going?

Every 3 months the Reserve Bank releases its OCR track. This is a forecast the bank releases showing where they might move the OCR, based on their current estimates.

interest rate prediction

Bear in mind this forward guidance changes regularly, so don’t expect it to move exactly like this. Six months ago the central bank forecast said the OCR will tip just over 2% by the time we make it to 2024, but we’re at this point already.

Now, it’s looking to be heading towards 4%.

For instance, if inflation is more stubborn, the OCR will be raised higher still. But, if there is a recession, the OCR will drop down.

Nonetheless, the OCR track can give us a sense of where the 1-year fixed interest rate will go.

Where Does The OCR Suggest Interest Rates Will Go?

So, let’s take the OCR track and add on the 2.5% margin to estimate the 1-year fixed interest rate. In that case, the forecast would be that the 1-year fixed would hit around the 6.5% mark, before dropping back down.

interest rates prediction

It’s important to note this spike in interest rates will be temporary.

Once inflation is wrangled back under control, the OCR can be brought back down.

Take a look at this clip of the Reserve Bank Governor, Adrian Orr, speaking at the most recent Monetary Policy Statement press conference.

forecasts interest rates mortgage

At the press conference he said: “I would like to say that once aggregate supply and demand are more in balance, then the OCR can return to a lower, more neutral level.”

Our assumption here at Opes is that interest rates will peak in 2023, track down in 2024, before reverting to the long-term rate in 2025 onwards.

However, we don’t think they will go as high as 6.5%, as the blunt analysis from above would suggest.

That’s because the OCR track is likely to change as economic events happen. For instance, there is a real risk of recession in the NZ and global economies.

If we saw the country tip into recession, people would feel less certain about their job prospects, and demand would be restrained.

That means the economy isn’t running as hot, so there would be less inflation. In that instance the OCR would not need to rise as quickly as the current track suggests.

That’s why we use the following interest rates in our cashflow modelling when running the numbers on an investment property –

1 year fixed interest rate NZ

These numbers have been adapted from those created by Tony Alexander, an independent economist.

Why Is The OCR Rising So Quickly?

Why is the Reserve Bank raising the OCR so rapidly?

The reason the OCR is rising faster than initially projected is because inflation is unusually high.

The Reserve Bank’s job is to keep medium-term inflation between the band of 1 and 3%.

forecast fore interest rates NZ

And over the last 10 years they have done an excellent job. On average inflation has been 1.64% (March 2012 – March 2022).

OCR interest rates nz

Currently inflation is sitting at 6.9%, which means it has all of a sudden skyrocketed far beyond the normal band.

interest rate forecast in NZ

Record-level inflation means the Reserve Bank had to take an aggressive approach to bring it down. And the way they do this is by raising the OCR.

How Does A Higher OCR Help Decrease Inflation?

Right now, there is a mismatch between supply and demand in New Zealand.

Demand is strong; supply is constrained. That’s why prices are rising.


This has been driven by a few factors, including:

  • A labour shortage, spun from a lack of people in New Zealand
  • Increased cost of importing goods
  • The war in Ukraine, which has meant fewer goods coming from the country, and higher cost of Russian imports after sanctions were imposed
  • High government spending related to Covid support measures

These factors are a direct result of recent events.

nz interest rates forecast

For instance, the Covid-19 pandemic closed New Zealand, which resulted in a labour shortage. We couldn’t import people to do jobs, and now we have negative net migration where more people are moving overseas than arriving into the country.

According to the NZ Institute of Economic Research, 72% of employers can’t find skilled labour.

Now, the war in Ukraine has impacted food export and import prices.

Because Russia and Ukraine make up 25% of the world's wheat exports, a decline in trade will push up the price of wheat and therefore bread.

All these factors are driving inflation up. So the Reserve Bank will increase the OCR.

Why? Because when interest rates rise, mortgages become more expensive. This means people have less money to spend on other goods.

And that means people will spend and borrow less.

It also means businesses may invest less than they otherwise would. Instead of spending money on a new digger, or a new studio, they might make do with what they already have.

This will constrain demand and bring it more in line with what the country can supply at current prices.

interest rate predictions nz
What's Happening In The Next 6 Months?

What Could Happen In The Next 6 Months To Affect The OCR?

Earlier we said its unlikely interest rates will rise to the figures our initial modelling – based on the OCR track alone – would suggest.

That’s because the OCR track is based on the assumption that other economic events won’t happen. But, of course, they will.

For instance, right now there is a real risk of recession in the New Zealand and global economies.

The Risk Of Recession

In the next six to 24 months, there is the risk of an economic downturn or recession.

This is because people don’t want to spend as much on things here in New Zealand.

According to economist Tony Alexander’s spending plans survey, 20% of people say they are not happy to spend money on things like tech, furniture or eating out (June 2022).

But the survey did reveal people are happy to spend money on international travel.

That’s important, because if people are spending less at home and more overseas, NZ consumers are supporting another country's economy and not ours.

And if a recession does come along, consumer sentiment will fall, people will feel less stable in their jobs, and this will cause spending to fall.

In that case, demand will be constrained, inflation won’t go as high or be as persistent, and the OCR will not rise as high or as quickly.

nz mortgage interest rates forecast 2022
What Term Should I Choose?

What Term Should I Fix My Interest Rate For In Today’s Market?

With current interest rates on the rise people might be thinking: “I’ve got to fix at a longer rate to avoid hiking interest rates”.

But today there could be a real risk in people fixing a rate for too long a term.

Yes, the one-year rate is likely to increase – potentially above what the 3 and 5-year rate is today, but on average the 1-year rate has tended to be cheaper.

For instance, interest rates are likely to rise, but after inflation is curbed they are likely to take a downturn. So if you lock in for 3 years, you risk locking in a rate that looks not great today, OK in a year’s time, and expensive in 3 years’ time.

So, in our view, there is more risk in fixing for too long than fixing for too short.

Yes, you’ll likely pay a higher interest rate in a year’s time, but on average your rate is likely to be lower.

Let’s look at the maths, based on Tony Alexander’s modelling.

Tony alexanders interest rates

This shows that if you fix on the 1-year rate for 2 years, your average interest rate will be 5.12% (based on our assumptions).

But, the current 2-year fixed rate is 5.19%. So that suggests that the 1-year rate is marginally cheaper.

Where is gets really telling is at the longer term rates. Fixing for the 1-year rate for 5 years, the average is modelled to be 4.7%, but the current fixed is 5.79%.

So you’re saving an average of 1.09% in interest per year, based on the modelling.

Just remember, it’s not necessarily cheaper to lock in for longer because interest rates are going up.

What If You're Wrong?

What If Your Interest Rate Forecast Is Wrong? I Can’t Bank On This Forecast Being Accurate

Forecasts are just forecasts. They are subject to change, depending on what happens in the world. And these things cannot be predicted with 100% accuracy.

So, if you’re a conservative investor, either run the numbers on your portfolio factoring in higher percentages in your forecasts, or lock in for a longer interest rate. It’ll likely cost you more over time, but you are paying for certainty.

The other thing to remember is that the bank will stress test your mortgage application at a much higher interest rate, so (at least in the bank’s eyes) if you can get a mortgage they have the confidence that you’ll be able to afford it.

predictions for interest rates NZ

You can also stress test your lending at higher interest rates. You can do this using our ROI (Return On Investment) Spreadsheet to model the cashflow of your investment properties.

This is a good tool to aid investors when running the numbers on an investment property.

Conclusion

So, What Are Opes Partners’ Interest Rate Forecast?

Right, after all that jibber-jabber, what’s the short answer to the initial question: What is our interest rate forecast?

The answer: 5.75% will be the peak in June 2023 for the 1-year fixed interest rate.

After this, rates will level out to a 4.5% long-term average.

This forecast is informed by 3 things.

The first is from the 10-year average for both the 1-year fixed term interest rate, and for the OCR (and how the two behave in parallel).

The second is how that average plots against the Reserve Bank’s OCR track.

The third is an assessment of other economists’ forecasts and considers factors that might change the OCR track e.g. recession.

That said, these are forecasts, so aren’t set in stone and are subject to change. We can’t see into the future to give an exact figure as much as we would like to. We’d have to build a time machine for that (don’t worry, we’re working on it!).

So, to be on the more cautious side, when you’re running your numbers at home to see how your personal lending is going to fare over the next few years you may like to do a stress test for a prediction a few notches above just to give yourself a good idea of where you’re sitting.

Q: What is the prediction of interest rates?

A: Here at Opes, we predict interest rates will go as far as 5.75%, before they level out to a long-term average of 4.5%.

Q: What should I lock my mortgage rate for today? E.g. 1-year, vs 3-year.

A: With current interest rates on the rise, it could be tempting to fix for a longer term.

But in today’s market, there could be a real risk in people fixing a rate for too long, once interest rates start to dip after inflation is tackled.

We don’t recommend fixing for longer than 2 years right now

Q: How do I get a low interest rate?

A: It depends on which bank you use, and what term you fix for. Currently, the main banks are offering a 1-year rate of between 4.5% and 5%. Non-banks offer higher floating rates.

Who are Opes Partners?
Opes Partners

What is the 3-Step Opes Coaching Programme?

1. Plan out your property investment portfolio

The first step in the programme is to co-create a plan using our MyWealth Plan software. We built this software specifically to help Kiwis create a financial plan in under an hour.

You'll leave this 1-hour session with a written down plan. Pen to paper.

2. Pick properties that fit with your plan

Once you've created your plan in step #1 – your property partner will go out and find properties that fit your plan. They'll search through projects from up to 58 developers to find the best ones for you.

When you meet again, you'll review the top picks, go through the analysis, crunch the numbers together, and then decide which ones to hold with the developer.

3. Dig into the details – Confirm it's the right property for you

Once you've selected a property, you'll work for 10 days to make sure it's the right property for you. So you'll work with your Property Partner and Client Relationship Manager to dig into the details of the property.

You'll go and look at the development and be introduced to mortgage brokers, solicitors, accountants, and property managers. Their sole job is to help you figure out if this property works for you.

And you’ll have access to all the resources, tools, and data … so when confirmation day comes, you have confidence you know you’re making the right decision.

Who is the Opes Coaching Programme the right fit for?

  • You understand the concept of property investment, but who wants help putting it into practice.
  • You want a “Done for you” property investment service, so you can be a hands-off investor.
  • You are someone who has at least a 10 year investment time horizon.
  • And finally, you’re ready to become a property investor.

Who is the Opes Coaching Programme is NOT the right fit for?

  • You’re more into the smell of paint or the colour of a wall than the numbers that stand behind an investment property.
  • You only want investments that are hands-on, so you can save a few dollars here and there.
  • You have plenty of time on your hands and want to do the property investment process yourselves.
  • You’re looking for an overnight success and want to get rich quickly.

What does it cost to work with Opes Partners and go through the programme?

It’s free. Complimentary. No Cost.

Why?

The developer pays us a marketing fee when you confirm that the property is the right fit for you. Very similar to the way a mortgage broker gets paid by the bank.

Now it's important to note that we are paid the same fixed rate no matter what property you invest in.

If it’s a $500k apartment in Christchurch or a $1.3 mil 3-bedroom townhouse in Ponsonby – we get paid the same rate.

That's important because then we can recommend the right property for you, and there's no incentive to recommend you invest in a more expensive property, just so we get paid more.

I want learn more about how Opes can help me

Learn more about the Opes Coaching Programme Here

LM b W

Laine Moger

Laine Moger has been a journalist and reporter for the last 6 years. She previously worked for Stuff, The North Shore Times and Radio NZ. She has a Bachelor of Communications (Honours) from Massey University and a Diploma of Journalism from the London School of Journalism.