Here come the low interest rates we've been hoping for

Mortgage rates could drop below 2 per cent within the next year, economists say, as the world reacts to the fallout from Covid-19.

The official cash rate is on hold at 0.25 per cent until March but it is increasingly expected that it could fall into negative territory by April.

ASB economists said they had revised their interest rate forecasts and expected home loans could soon fall below 2 per cent. At the moment, banks are offering rates from 2.55 per cent.

They said that mortgage interest rates were influenced by a range of factors, including the official cash rate, developments in domestic and global fixed-interest markets and other influences on bank funding costs – as well as quantitative easing.

They said they expected mortgage rates to fall over the coming year and if the Reserve Bank cut the official cash rate to -0.5 per cent next year, as ASB forecast, fixed-term mortgage interest rates could dip below 2 per cent over the year ahead, and all fixed terms should stay below current levels for the next two or three years.

Lower interest rates were likely to boost asset prices, they said. Interest rates should settle at levels well below long-run averages over the past 20 years.

“These low rates are nearly 2 per cent below the floating rates, at or near record lows, and available with rates around 2.6 per cent. At the other end of the curve, five-year rates are 1.25 per cent or more below floating rates, and in the low 3 per cent range now.”


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