Are interest rates about to take a turn?

After a prolonged period of relief for borrowers, New Zealand’s interest-rate outlook is once again under scrutiny. Inflation has nudged back outside the Reserve Bank’s target band, raising fresh questions about whether the easing cycle has further to run, or if caution is about to creep back into monetary policy. With the next Official Cash Rate announcement due in just over a week, and another increase in the unemployment rate, all eyes are on what’s next for the all-important number and ultimately what that will mean for our interest rates then and beyond.

Infometrics CEO Brad Olsen says he has no doubt that the Reserve Bank will be worried.

“They’ve got a job to do, and that’s to keep inflation within a band, and ideally near the midpoint but now it's snuck outside the top. That might not sound awful, but it doesn't happen often, so the fact that it has really does start to ring a few alarm bells.”

Especially since it goes against a lot of what the Reserve Bank was saying last year.

“That conversation was that there was a lot of spare capacity in the economy, and because of that businesses shouldn't be able or willing to lift their prices, but clearly the rest of the market hasn't got that message, because they have been lifting prices.”

Much of the market was picking inflation to land on 3%, but instead it crept slightly higher than that, now sitting at 3.1%. But what Olsen says is most concerning is that it can’t be blamed on a single factor.

“You didn't look at one item and think that explains it, that if you just ignore that one little thing, that everything is fine. In reality, there were enough different parts of the data that looked hotter than everyone expected.”

“Now if you've already got inflation that's already at a hotter pace, and then you add on top the most recent OCR cuts which will only fully hit the market this year, then you could be adding even more fuel to the fire too.”

It’s a move that’s already triggered some banks to shift their interest rates up, even before the next OCR announcement.

“Some of those longer dated retail mortgage rates have lifted across a number of banks, because there does seem to be a view that if you take the OCR below three you're going to need to take the defibrillator away from the economy and get us back to an even keel and that will require mortgage rates to rise.”

WHAT HAPPENS WHEN LAST YEAR’S OCR CUTS COME THROUGH?

The more people spend, the more inflation can ignite, so could it get worse when last year’s cuts filter through the economy?

Olsen says lower mortgage rates haven’t had much of an impact yet, and one of the reasons is that for many people they are still grappling with unemployment and job uncertainty.

“That’s the worry around the labour market still. The number of job ads is still around 25% below 2019/2020 levels, and there are three and a half times more applications per job being listed on job sites than there were pre-pandemic.”

That reality was made clear in the latest unemployment data, sitting at its highest rate in a decade at 5.4%, driven by a large number of people re-entering the workforce with no jobs to service them right now.

“The competition for jobs is a lot more intense and restrained how quickly that momentum has been in terms of spending. Boxing Day spending was down 12% year on year, so households aren't necessarily driving towards it quickly yet.”

Which could reduce the pressure on inflation - for now.

WHAT CAN WE EXPECT FROM THE NEXT OCR ANNOUNCEMENT AND BEYOND?

With the Reserve Bank due to assess the OCR on February 18th, Olsen is expecting the rate to hold at 2.25%.

“We don't think there's enough evidence that the Reserve Bank could go from cutting, which they were doing last year to all of a sudden raising.”

“Our forecast is that we'll get one increase to the OCR in the last quarter of the year though. That's the formal view at the moment.”

But if the market and the data continue to trend hot, Olsen expects the earliest rise could come in May.

“I feel like it's becoming more and more apparent that the cuts late last year were probably not the right move.”

“In hindsight, we signaled our concern at the time that we risk doing exactly this - cutting and then having to raise a bit to compensate, rather than just having a bit more stability in the middle. So far, that expectation, frustratingly, does seem to be playing out a bit more.”

WHAT WILL THIS MEAN FOR YOUR MORTGAGE?

Some increases to retail interest rates have already occurred, but Olsen says so far it only applies to the longer-term rates.

“That includes the two fixed terms, and above which has more been driven by where wholesale rates, swap rates and all of those interest rates on the wholesale market have gone.”

“I feel like the retail banks have already priced in a fair amount of that change already though, so unless there's a material change in where those swap rates are, there’s limited scope for further movement.”

At least until the next OCR announcement on the 18th.

WHAT ABOUT HOUSE PRICES?

With an increase to the OCR looming in the longer term, will that slow the potential growth in house prices as it becomes more expensive to borrow money?

Olsen says broadly he sees house prices mostly moving sideways.

“Already at the end of last year there was a huge amount of stock and, more importantly, there wasn't a huge amount of additional demand.”

“Population growth has also slowed quite considerably, and lower interest rates haven't meant that people have spent. Therefore, if interest rates start to go up it will further undermine how much house prices could increase.”

IS IT REALLY GOLDILOCKS SEASON FOR BUYERS THEN?

The idea that it’s not too hot, and not too cold. That buyers can borrow at a cheaper interest rate and purchase while prices sit far from their peak.

“It depends on where you buy. Auckland and Wellington are still pretty hot, it's not bad potential, as long as you're buying it for your own place.”

“Because, of course, both of those major centres have also seen rent falls. So, if you're buying it as an investor, you might be buying a cheaper house, but you're equally going to make less money on it as well - so you’ll want to factor that in.”

Ultimately, the path for interest rates will hinge on how convincingly inflation can be brought back under control without stalling economic momentum. While the next OCR decision will set the tone for the months ahead, the bigger story lies in the balance the Reserve Bank must strike as New Zealand moves through 2026 - between supporting growth, protecting price stability and responding to global uncertainty.