Interest rates: what goes down ….

The RBNZ chopped the OCR by 250 basis points from 5.5% to the current 3.00% in August last year. Economists reckon the central bank’s monetary policy committee could go even further, suggesting a 25-basis point cut within the next 6–12 months that will take the official rate into the 2s.

Home mortgage rates are following suit. ASB’s one-year fixed mortgage rate has dropped to 4.79%. ASB, ANZ, Kiwibank, Westpac, and BNZ are all offering one-year fixed terms at 4.79%.

With close to half the stock of mortgages due to reprice during the September and December 2025 quarters, that’s a lot of landlords about to get relief on their interest payments.

However, there’s a fly in the economic ointment that might rupture this rather pleasant trend line: inflation is still at an above-average 2.7%, despite weaknesses in the economy.

Economic reality check

The annual inflation rate in New Zealand, as measured by the Consumer Price Index (CPI), was 2.7% in the 12 months to the June 2025 quarter, according to Stats NZ. This is up from 2.5% in the 12 months to the March 2025 quarter.

Core inflation is currently easing at around 3.0%, though some components of non-tradable inflation, such as rent and insurance, remain elevated.

Warning signs

Independent economist Tony Alexander reckons that once economic growth picks up, inflation will rise, and interest rates will, too. Could the current rate cuts be setting us up for a boomerang effect? Possibly.

One factor worth considering is our lingering productivity problem. Over the past three years, New Zealand’s level of productivity has declined. That’s no good for inflation. When businesses are less productive, they tend to have higher costs to produce goods and services.

Cost increases are usually passed on to consumers in the form of higher prices, driving up inflation. Tariffs could heap further pressure on prices. Then consider razor-thin business margins. One measure shows margins at their worst levels since at least 1970 – another reason to raise prices.

What to do

• Short-term (Next 6-12 months): With possible follow-up cuts in October, your mortgage refixes should come at lower rates. The 1-year mortgage rate closely follows the OCR, with a typical margin of 2.24%
• Medium-term (2026-2027): Alexander’s warning: If rates get cut to, say, 2.5% in the next six months, borrowers should anticipate relatively quick increases once we get into 2027.

The RBNZ is projecting inflation to increase to 2.7% in Q3 2025, then return to near the 2% target midpoint from 2026. Projections – they’re educated guesses, not guarantees.

Consider splitting your mortgage fixes across different terms. Most people fix for just one term. Common time periods are 12, 18, and 24 months. But fixing for just one term means any shock change in interest rates come renewal time will hit all at once. Think of it as diversification for your debt.  Split your mortgages across 1, 2, and 3-year terms

The RBNZ has estimated that a ‘neutral’ OCR sits at around 3%, meaning interest rates should settle somewhere between 4.50% and 5.00%. Use the current rate relief to build reserves for when rates inevitably climb back up.

Rare sweet spot – not new normal

Rates are falling and your properties are getting cheaper to hold. But this isn’t the new normal – it’s economic medicine. This practice will buy some adjustment time when rates eventually turn. Savvy investors will use this window to strengthen their positions, not extend them recklessly. Because what goes down in a cycle must come up – and the smart money is already preparing for that reality.

This is economic commentary, not financial advice. Always consult your accountant. Got questions about your portfolio strategy? Hit reply or call 0800 GOODWINS to make an appointment with one of our property experts.