Kiwibank says markets are pricing too many official cash rate hikes
Rising US government bond yields are pushing up New Zealand's wholesale interest rates and adding pressure to fixed mortgage pricing, according to Kiwibank economists.
Kiwibank, in its First View economic report, said US rates were at their highest in 25 years. Strong American economic data has led traders to price in further Federal Reserve tightening, and that has flowed through to local swap rates, which lenders use to price fixed-term home loans.
"Because New Zealand is a small fish in a massive pond, wholesale funding costs are always influenced by international developments," the report said.
Curve steepens as global yields climb
The gap between New Zealand's two-year and 10-year government bond rates has widened from 100 basis points in May to 120 basis points, which Kiwibank described as global rates "lifting and twisting" the local yield curve.
Swap rates did ease last week, however, with the two-year rate closing at 4.02%, down 10 basis points, while the five-year rate fell 6 basis points to 4.41% and the 10-year slipped 2 basis points to 4.77%, Kiwibank traders said.
With fixed rates for two- to five-year terms now above 5%, Westpac said locking in for longer could still protect borrowers from further official cash rate (OCR) increases over the next two years.
Markets ahead of the Reserve Bank
Overnight index swap pricing implies an OCR of about 3.1% by the end of 2026. Markets also have the OCR rising above 4% next year and reaching 4.1% by December 2027.
Kiwibank said markets had moved well ahead of the Reserve Bank of New Zealand (RBNZ).
"There are too many hikes priced, and well above the RBNZ's own track," Kiwibank's economists wrote.
Kiwibank trader Graham Huges said markets had pared back expectations for an October move to around a 50% chance, from 75%, after weaker local business and consumer confidence readings. He expected the eventual rate path to settle somewhere between the RBNZ's cautious projections and current market pricing.
Other bank economists differ on how far the OCR will go. With the OCR at 2.75%, Westpac expects the RBNZ to pause at its 28 October review before hiking 25 basis points in December and peaking at 4% next year. ANZ expects a 25-basis-point hike in October instead, followed by two more increases in early 2027 to a 3.5% peak, while ASB forecasts 50 basis points of hikes by year end and a 3.25% OCR peak, saying the tightening priced for 2027 looks excessive.
Weak dollar a mixed blessing
The New Zealand dollar has fallen below 56 US cents, helping exporters and tourism operators but adding to fuel and imported inflation pressures, which Kiwibank said complicates the RBNZ's outlook.
Domestically, filled jobs rose again in September. Consumer confidence was largely unchanged, and expectations of house price growth eased. Kiwibank said a recovery in consumer sentiment remained the key missing piece for New Zealand's economic recovery.
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