Mortgage rates may have hit rock bottom: economists

Mortgage rates may already have hit a low point, despite the Reserve Bank signalling it is ‘‘likely’’ to cut interest rates further.

On Thursday, the Reserve Bank cut the Official Cash Rate (OCR) from 3 per cent to 2.75 per cent and said it ‘‘seems likely’’ that there would be another cut, probably this year.

The OCR heavily influences the interest rates paid on mortgages and paid to depositors.

Within minutes, floating rate mortgages were cut in response to the announcement.

But economists warn that the recent falls in fixed-rate mortgages, to the lowest level in decades, may only continue downwards if the central bank goes further than it expects.

On September 4, BNZ announced a new record low advertised rate of 4.35 per cent for a one-year fixed-term loan, a fall of 0.25 per cent. ASB is offering a special rate to fix for five years at just over 5 per cent.

However, Chris TennentBrown, senior economist at ASB, said today’s news may not lead to further falls, as the banks had already assumed that the Reserve Bank would cut the rate in the way that they are.

‘‘There’s potential, if we get another cut, for [mortgage rates] to be slightly lower, but there’s already a lot of that priced in’’ to the current rates, Tennent-Brown said.

Tennant-Brown said that during 2014 when the Reserve Bank was raising the OCR, the interest rate on five-year mortgages was actually falling, as the international outlook for interest rates were weakening.

There was a risk that the opposite could happen now, with the US Federal Reserve - the equivalent of our Reserve Bank - considering increasing interest rates.

"We could see a situation where the Reserve Bank cuts another time but the five year rate starts lifting."

What may drive mortgage rates lower though, would be if New Zealand sees a major drought, or the Chinese economy slows even more than is feared.

The Reserve Bank Governor said that, if needed, there was ‘‘plenty of room’’ to cut interest rates further. A statement in the central bank’s statement suggested the OCR could be cut to 2 per cent.

ASB, BNZ and Westpac said the comments raised the possibility that the Reserve Bank could cut the OCR below 2.5 per cent, which would represent an all time low, and this would probably prompt further falls in short term fixedrate mortgages.