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Interest rates will likely come down during 2024. Here at Opes Partners, we think interest rates will fall to 6.5% (-0.80%) by March 2025. We think interest rates will continue declining gradually to 5.50% by March 2026, and to 5% by March 2027, eventually landing around 4.5% in 2028.

But, of course, this is our best guess. No-one knows for sure.

We expect these forecasts to be wrong.

That leads to a great question. Why bother putting together a forecast at all?

Here at Opes, we encourage investors to forecast the cash flow of their properties. So, we need to “guesstimate” where interest rates might head.

Things happen worldwide that pull the economy in all sorts of directions. Those events can cause these forecasts to be wrong.

A few years back no-one predicted a pandemic, a war in Ukraine, and some of the worst flooding our country has seen. So, when we look at these numbers in a year, our forecast will change.

The exact numbers will likely be wrong, but it’s the general direction we’re trying to pick.

Where do the banks think interest rates will head?  

Each bank has its own view on where interest rates will go. ANZ is the only one that publishes specific interest rate forecasts.

ANZ currently thinks the 1-year interest rate will fall to 5.7% by March 2025, and then under 5.5% by the end of 2025.

In other words, they think that interest rates will fall more aggressively than we do.

If ANZ is right, the repayments on a $600,000 mortgage would fall by $177 a week.

Our Current Interest Rate Predictions (April 2024)

Will the OCR go up or down?

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

The Reserve Bank doesn’t think the OCR will go down for a while.

They plan to keep it around 5.5% for all of 2024.

But are they just talking tough to get inflation down?

One way the Reserve Bank lowers inflation is by increasing interest rates. The other way is by giving speeches.

If they talk tough we, the consumers, get scared.

We might delay making a major purchasing decision like a spa, car, or investment. We might think, “Let’s just wait and see what happens first.”

That decreases spending and keeps inflation a bit lower. This gives them an incentive to keep their OCR forecasts high.

My analysis suggests that the Reserve Bank doesn’t often stick to its own forecasts. Over the last 4 or 5 years the Reserve Bank has often deviated widely from what they said they’d do.

The interest rate markets agree.

They expect the OCR to come down much more quickly than the Reserve Bank says.

By looking at the wholesale rates we can get a sense of how fast the market thinks rates will fall.

Currently, this pricing suggests the OCR could come down 0.5% by the end of the year.

That suggests the OCR (and other interest rates) could drop quickly in 2024.

It all depends on what happens with inflation.

So, what’s happening with inflation?

Interest rates will only fall if inflation falls.

Right now, inflation is 4.7%. That is still too high. The Reserve Bank’s goal is to keep inflation between 1-3% over the medium term.

But while inflation is high, it is coming down. And it’s coming down faster than the Reserve Bank thought it would.

As mentioned, inflation is 4.7% (December 2023). That’s lower than the 5% the Reserve Bank thought it would be.

A year ago inflation was 7.2%. So inflation has fallen 2.5% over the last year.

Most banks expect this trend to continue. Many think inflation will be back under 3% before the end of the year.

Inflation is too high, but it’s heading in the right direction.

Where will interest rates head over the long term?

Over the long term, we assume the 1-year mortgage interest rate will be 4.5%.

It won’t be 4.5% forever; sometimes interest rates will be higher, sometimes lower. The future is uncertain. After all, it hasn’t happened yet.

But here at Opes Partners, we feel 4.5% is the right number to use for 2 reasons.

#1 The OCR should be 2-2.5% over the long term

The Reserve Bank suggests that the long-term neutral OCR is around 2-2.5%.

That means when they are neither trying to speed up nor slow down the economy, the OCR should be around 2%.

Looking back over the last 20+ years, the average difference between the OCR and the 1-year fixed rate is about 2.2%.

There are differences, but the pair follow the same broad trend over time.

If the long-term neutral OCR is around 2-2.5%, then over the long term the 1-year rate should hover around 4.5%.

#2 The long-term average 1-year rate is around 4.5%

Over the last 10 years, the 1-year fixed interest rate has averaged 4.55%. This represents a “more normal” level of interest rates.

How long should I fix my interest rate?

At Opes, we typically recommend fixing for the 1-year rate.

The 1-year rate is the most expensive today, but once interest rates come down, today’s longer-term rates will look expensive.

John and Sarah own an investment property and are deciding between 1 and 5-year fixed rates.

The 1-year is more expensive, and the 5-year is currently cheaper.

If they go for the 5-year rate today, they’ll save a bit of money. But, what happens if interest rates fall after a year?

They saved money in the first year, but over the next four years they might pay a much higher interest rate than they could otherwise get.

  That’s why many mortgage brokers say borrowers want shorter-term rates.

90% of mortgage brokers say customers prefer locking in for 1 year or less. That’s according to Tony Alexander’s Mortgage adviser survey (February 2024).

In that same survey, only 10% of advisers say customers prefer the 18-month term. No brokers say that most borrowers prefer fixing for 2 years or longer.

Right now, there is more risk in fixing for too long than fixing for too short.

What if your interest rate forecast is wrong?

Some investors ask, “What happens if your forecasts are wrong?”

They will be. 

They are just best guesses based on the facts we have today. When the facts change, we change the forecast.

You can’t predict the future with 100% accuracy.

But either way, we do know which way interest rates are heading. 

So, if you’re a conservative investor, either:

  • run the numbers on your portfolio, factoring in higher rates 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.

You can also “stress test” your lending at higher interest rates.

Download our Return On Investment spreadsheet to check your numbers. This can help you run the numbers on an investment property.

Opes Partners
Ed solo

Ed McKnight

Our Resident Economist, with a GradDipEcon and over five years at Opes Partners, is a trusted contributor to NZ Property Investor, Informed Investor, Stuff, Business Desk, and OneRoof.

Ed, our Resident Economist, is equipped with a GradDipEcon, a GradCertStratMgmt, BMus, and over five years of experience as Opes Partners' economist. His expertise in economics has led him to contribute articles to reputable publications like NZ Property Investor, Informed Investor, OneRoof, Stuff, and Business Desk. You might have also seen him share his insights on television programs such as The Project and Breakfast.

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