Private Property issue #142 - New inflation data

New inflation data dropped yesterday. Inflation held steady at 2.2%. No change since last quarter.

That shows that the cost of living crisis is coming back under control. 

So, what’s going to happen to your mortgage interest rate? And are house prices going up or down, right now?

How much will the OCR go down next month?

If I was Adrian Orr – I’d be pretty chuffed with inflation staying at 2.2%.

Remember, his target is 1 – 3%. But he really wants that midpoint of 2%. 

The Reserve Bank thought that inflation would come in at 2.1%. 

So, yup, the actual number we got yesterday was a smidge higher. But only 0.1%. Not too much to worry about. 

That means the economy is broadly unfolding how the Reserve Bank thought it would. And that means they can stay the course. 

At the last monetary policy announcement, Adrian Orr said they’re pencilling in a 0.5% OCR cut in February. 

These numbers make that 0.5% more likely to happen. 

Even better news is the makeup of inflation. Economists often break inflation down into domestic (non-tradeable) and imported (tradeable) inflation.

While Adrian Orr cares about overall inflation, he can only do anything about homegrown inflation. That’s what the OCR targets. 

And the data shows that domestic inflation (which had been stubbornly high) is finally easing. 

The Reserve Bank thought domestic inflation would be 4.7%. It came in at 4.5%, 0.2% below what they forecasted. That’s good news. 

That is a welcome surprise for the Reserve Bank. Again, it makes it more likely that Adrian Orr will do what he said back in November and cut the OCR by 0.5%. 

What will happen to your mortgage interest rate?

Banks are already cutting their rates in anticipation of the next OCR cut. 

Last week, ASB cut 0.2% off their 1-year mortgage rate. That’s now sitting at 5.59%.

This week, BNZ matched it. 

Cheeky ANZ dropped to 5.57% (just 0.02% under the competition).

These moves mean that if you have a $500k mortgage, the repayment is $15-ish cheaper per week. That’s on a 30-year mortgage. 

Just keep in mind that we had massive interest rate drops last year. The 1-year rate went from 7.4% down to 5.8%. That’s a 1.6% drop. 

That won’t be repeated in 2025. 

So, expect to see mortgage interest rates falling, but at a slower rate. 

So rather than a 0.5% cut in the OCR = a 1% drop in the 1-year rate. 

It’s more like a 0.5% cut in the OCR = a 0.2% drop in the 1-year rate. 

That’s because banks have moved a lot already in anticipation of what the Reserve Bank will do. 

What about house prices?

We also got new house price data out yesterday. It shows that house prices are going sideways. 

From August to November 2024, prices rose 2% nationwide but fell 0.7% in December. 

However, December’s dip is seasonal. It’s a quiet month, so house prices usually go down a bit. Once you take out that effect, house prices were essentially flat.

So, we aren’t seeing a massive pick-up in house prices just yet. This is good news for buyers but less exciting for existing property owners waiting for gains.

Rents, however, are rising – up 4.2% year-on-year.

This is surprising, considering how tough the rental market is. Some rentals are sitting vacant for weeks longer than this time last year.