Mortgage pain could return before Christmas

• Tweet

Fixed mortgage interest rates could start rising before Christmas because the economy’s direction is now up, economist Tony Alexander says.

Friday, December 5th 2025, 8:19AM 2 Comments

by Sally Lindsay

He says last week’s RBNZ 0.25% OCR cut to stimulate the economy and the 0.50% drop in October were not needed. “The chances are high the Reserve Bank has cut interest rates too far.”

He bases his assumption that long-term interest rates could rise before the end of the year on data released less than a day after the most recent OCR fall.

The ANZ Business Outlook Survey shows the number of businesses expecting the economy to do well over the next 12 months rising from 58% in October to an 11-year high of 67%, the number expecting their own activity levels to grow lifting to 53% from 45% – also an 11-year high and the number planning to hire more staff lifting to 19% from 15%, but investment intentions easing to 22% from 20%.

Other data shows retail spending rising to 1.9% in the September quarter rather than the commonly estimated 0.6%, the ANZ Roy Morgan Consumer Confidence Index firming to 98.4 from 92.4, the average expectation for inflation in two years’ time rising to 5.2% from 5.1% and the number of businesses planning to raise their prices  running at twice the average consistent with inflation near 2.3%.

Alexander says while the data shows the economic recovery is well underway there are concerns about the speed at which inflation will lift once businesses start seeing more customers come through the door and lift their prices to rebuild margins.

After shrinking 1.1% in the year to June with job numbers falling 0.6% in the September quarter from a year earlier, inflation has only eased from the 7.3% peak of mid-2022 to the top of the 1%-3% target range.

“The risk is that inflation will return far earlier in the upturn than many are counting on and that the markets are currently pricing for.”

The question now, he says, is whether the RBNZ continues its past practice and leaves the OCR at overly low levels for too long. “A change in Governor makes that a hard pick. The risk is the central bank tightens earlier than previous occupants of the position would have opted for.”

Before then borrowers should expect to see a rise in fixed mortgage rates which could easily come before Christmas given the drift of things starting to appear in the financial markets
now, Alexander says. 

In Australia expectations have shifted from more rate cuts to perhaps two rate rises late next year.

It pays to note the cyclical lows for New Zealand interest rates look like they were hit in about the middle of October, he says. 

The one-year swap rate in mid-October dropped to about 2.35% from 2.8% six weeks earlier. Now, about six weeks later the rate is near 2.52%. The three-year swap rate over the same period bottomed out at 2.6% from 3% and is now about 3.04%.

Or to look at it another way – all swap rates are higher than they were before the 0.50% cash rate cut on October 8.

Pressure is developing for an increase in fixed rates longer than one year. “The clock is ticking for this cycle’s fixed mortgage rate lows.”

While there is no obvious pressure for banks to raise their one-year fixed mortgage rates, it is definitely building for the two- and three-year terms, Alexander says. “Same for the five-year rate. Soon it will be bye bye to 4.99%.

“Most people taking new mortgages or refixing will opt for the one-year term near 4.49% because it is the cheapest rate on offer and they won’t be giving much thought to inflation and interest rate upside risks.”

Alexander says, however, if inflation does return much earlier than predicted and interest rates also rise, the extent of house price increases this cycle will be contained.

Comments from our readers

Sign In to add your comment