What is the forecast for mortgage interest rates in NZ for 2026

After three years of tough times, the NZ economy is finally showing a solid growth upswing with GDP growth predicted to pick up from a weak 0.4% in 2025 to 2.5% by the end of 2026. The outlook for key export commodities is also very positive. However global core inflation remains above central banks targets and growing geo-political uncertainly will also add pressure on interest rates.

Before we try to predict what might happen in the future we need to understand what factors drive mortgage interest rates in NZ.

Key drivers include:

• Official Cash Rate (OCR): The RBNZ sets the OCR to manage inflation (target 1-3%). As the economy recovers the OCR tends to rise which in turn puts upwards pressure on mortgage rates.

• Wholesale Swap Rates: Fixed-rate mortgages are heavily influenced by the wholesale swap market, which reflects international market expectations of future interest rates not just the current OCR.

• Bank Funding Costs: Banks source funds from domestic deposits and international wholesale money markets. If it costs more to secure these funds, banks pass these costs to borrowers.

• Economic Conditions: High inflation, strong employment, or global economic uncertainty can lead the RBNZ to raise rates to cool the economy.

• Competition: Competition between banks can lead to lower rates and special rates for a brief time to attract customers. Point to note here is the RBNZ in December last year reduced the amount of capital banks are required to hold by about 3.4 billion. This allows bank to lend more. It will be interesting to see if banks start to compete harder to use this extra lending capacity.

What is the current view?

There were expectations that the OCR would continue to fall, but it looks like the easing cycle may be nearing its end. The Reserve Bank announced in their 18 February meeting that it was keeping the OCR on hold at 2.25%. Their view is that inflation will remain within the target range over the next 12 months. However, some economists are forecasting that as the economy recovers the OCR may start to creep up in the later part of 2026 and beyond into 2027/28.

2026 will be an unusual year as we have elections in both NZ (7th Nov) and mid-terms election in the USA (3^rd Nov). These are expected to impact mortgage interest rates primarily through policy uncertainty and its potential to influence both fiscal (Government spending and Taxation) and monetary policy (supply and cost of money). If a government plans to spend more where will this money come from?

·       decreased Government expenditure

·       increased Government borrowing

·       or an increase in taxation

All these can have a positive or negative effect on interest rates. But this is really a question for 2027!

International risks are also increasing due to armed conflicts, political instability, and the dismantling of rules based trade. Whenever risk increases in the international environment so to do interest rates. Some of these risks will be short lived whilst others will have longer term impacts. We have already seen oil and international shipping prices increase due to the current situation in the Middle East.

Depending on the international environment I would think 2026 will see interest rates remain stable in the first half of the year with some small movement before increasing towards the second half of the year and into 2027 /28 as the economy recovers.