Economic Forecast Predicts Mortgage Rates May Surpass 6% by 2027

The economic forecaster Infometrics has raised concerns that mortgage rates could exceed 6% by 2027 due to potential inflationary pressures stemming from aggressive monetary policy decisions. Chief forecaster Gareth Kiernan highlighted the delicate balance the Reserve Bank faces between stimulating economic recovery and risking overheating.

In a research note released today, Kiernan warned that if economic growth accelerates faster than anticipated over the next 18 months, there could be significant strains on the economy’s capacity. He indicated that renewed inflation could emerge by the first half of 2027, potentially necessitating an increase in the Official Cash Rate (OCR) to 4% to stabilize growth. Under such circumstances, one-year fixed mortgage rates, currently around 4.49%, could rise to approximately 6%.

Infometrics articulated these concerns amid ongoing uncertainty about the economy’s recovery from a recent downturn. Data from the Ministry of Social Development (MSD) indicated an increase in the number of individuals receiving JobSeeker support, which reached 217,818 as of September 30. Despite MSD’s caution against quarterly comparisons due to seasonal adjustments, the figures revealed a rise of 1,809 recipients since June 30.

Kiernan projected that if the economic recovery remains robust, growth could accelerate to 2.3% per year by early 2027, surpassing the 1.4% annual average seen during the 2010s. He anticipates stronger household spending and increased business investment and residential construction, particularly in 2027. This outlook suggests that a new round of monetary policy tightening may be required from late 2026 to align interest rates with neutral levels.

Many economists expect that the forthcoming report from Stats NZ will show annual inflation exceeding 3% for the three months ending September. However, this increase is considered a temporary fluctuation. Kiernan noted that clarity regarding the potential for higher inflation may not emerge until the latter half of next year.

In October, the Reserve Bank reduced the OCR by 50 basis points to 2.5%, hinting at the possibility of further cuts that could lower the OCR to 2%. The last monetary policy statement from August indicated that the OCR was unlikely to fluctuate significantly between 2026 and 2028.

Kiernan expressed concern that the Reserve Bank’s eagerness for economic growth might lead to short-sighted decisions. “There’s been a little bit of impatience from them in terms of wanting economic growth to come through a bit more strongly, a bit faster,” he said. He emphasized that the housing market remains relatively unaffordable, questioning the central bank’s focus on stimulating it as part of the broader recovery strategy.

Reflecting on the Reserve Bank’s recent history, Kiernan remarked, “It had been apparent that the Reserve Bank had not been as forward-looking as it should have been over the last four or five years.” He called for a more cautious approach moving forward, noting that the current trajectory may pose risks to long-term economic stability.