Doubts Arise Over Expected Interest Rate Cuts

By MFAS trusted mortgage broker Rajendra Balchandani (Raj, Accord Home Loans).

Concerns are rising about impending interest rate cuts. Independent economist Tony Alexander has warned that, regardless of the October election outcome, fiscal policies must be tightened due to worsening government finances.

Government accounts for the 11 months ending in May showed a $2 billion tax revenue shortfall compared to Treasury’s forecasts, with expectations of further decline due to slow economic growth. The Reserve Bank has revised its projection, anticipating this year’s deficit to rise from 0.8% to 2.3%.

In addition, the International Monetary Fund (IMF) has issued a stark warning of a potential more severe recession than the recent one, with New Zealand expected to have one of the lowest growth rates among 159 monitored countries.

Finance Minister Grant Robertson has already cut $4 billion in government spending and called for increased departmental efficiency in response.

Optimism for tax cuts or spending increases should be tempered, as Alexander advises that any incoming government will likely need to address these fiscal challenges post the October 14 election.

Furthermore, the expanding deficit could push interest rates upward. Recent bank interest rate hikes, driven by U.S. inflation concerns, may also impact New Zealand.

The increase in U.S. wholesale interest rates is partly due to the growing issuance of U.S. Treasury debt, a factor also influencing New Zealand.

The deteriorating government accounts primarily stem from businesses grappling with rising costs and an inability to pass them on to consumers, leading to reduced tax payments.

Amidst rising interest rates, mortgage borrowers are favouring longer-term fixed rates. Data from the Reserve Bank of New Zealand shows a drop in July’s residential mortgage lending compared to the previous month. Borrowers are increasingly opting for longer-term fixed interest rates, while floating term preferences have hit a record low.

Owner-occupier lending primarily leans toward one-year fixed terms, but two-year fixed terms are gaining traction while three-year terms are less favoured. Residential investors are following suit, favouring two-year fixed terms while decreasing interest in three-year fixed terms.

In such an uncertain financial climate, financial advisers can provide invaluable guidance to borrowers, helping them navigate changing interest rates and find the most suitable mortgage options to meet their financial goals and needs.