This is almost as good as it gets for borrowers

Mortgage rates have slumped more than two per cent over the past 18 months, but don’t expect much more relief.

The Reserve Bank of New Zealand (RBNZ) left the Official Cash Rate (OCR) unchanged at 3.25 per cent last week, as was widely expected by economists and financial markets.

This was the first “no change” decision in a year, after six consecutive cuts that took the OCR from a 15-year high of 5.50 per cent to its current level.

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One reason for the pause is that the RBNZ is braced for a spike in inflation.

It does, however, believe this will prove temporary because of the spare capacity we’re seeing in the economy.

At 5.1 per cent, unemployment is the highest since 2016 (excluding the COVID-era) and it’s expected to increase a little further before stabilising.

This level of labour market slack usually keeps a lid on domestic inflation pressures.

The RBNZ isn’t done with cutting rates just yet, but an important insight borrowers should take from last week’s decision is that we are nearing the end of the easing cycle.

Of the big four Australian banks and Kiwibank, forecasts for where the OCR troughs range from 2.50 to 3.00 per cent.

The most recent RBNZ projections imply a floor of either 3.00 or 2.75 per cent, with the odds slightly tilted towards the latter.

Whoever you choose to believe, it’s clear the bottom is getting closer.

For most of us, this matters because of what it means for borrowing costs and the household budget.

Mortgage rates have already fallen a long way. The two-year rate is 5.0 per cent right now, down from 7.0 per cent at the end of 2023.

It’s important to understand that your mortgage rate isn’t driven solely by moves in the OCR.

Global economic conditions, wholesale interest rates, bank funding costs and competition among lenders can also have a big influence.

There’s still a strong relationship though, especially for the shorter mortgage terms.

In the past six months the gap between the OCR and the two-year rate has been about 1.5 per cent, well below the average since 2017 of 2.2 per cent.

That tight spread could mean there’s less room for mortgage rates to fall, even if we do see another OCR cut or three.

The outlook could change if we experienced a global economic shock, or if inflation proved more persistent than expected.

However, right now the base case points to limited further relief.

As our biggest lender, ANZ likely has some useful insights about the mortgage market.

Its latest monthly property report suggests the two-year mortgage rate will bottom at 4.9 per cent later this year, only marginally below current levels.

It has the one-year slightly lower at 4.7 per cent, while the three- and five-year rates don’t dip below five per cent in its projections.

This conservative outlook is notable, given ANZ (along with Kiwibank) sees the OCR falling to 2.50 per cent.

The upshot here is that most of the downward move in mortgage rates is behind us.

I wouldn’t say this is “as good as it gets” for borrowers, but we’re much closer to that point than many think.

The next OCR decision is due in late August and importantly, this one will also see the release of a new forecast set.

This is the natural opportunity for the next cut, but there are a few things to monitor between now and then.

Next week’s June quarter consumer price index (CPI) report is one, while the labour force report on 7 August will also be crucial.

Assuming those are close to RBNZ projections, there’s a decent chance we see a 0.25 per cent cut at that time.

That would take the OCR to 3.00 per cent, close to neutral and where it sat comfortably for six years from 2010 to 2015.

The focus will then shift to whether that’s as low as it goes this cycle. With mortgage spreads already compressed relative to recent years and the OCR within neutral territory, borrowers hoping for much lower rates will be left disappointed.

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