Market Update: Interest Rates, Investor Sentiment, and Mortgage Strategy

The markets appear to be stabilising, with much of the decline seen following "Liberation Day" largely recovered, despite recent volatility sparked by tariff announcements. While it's tempting to view this rebound as a return to "happy days," it may be more accurately described as cautious optimism or relief.  The Fonz isn’t quite giving it the thumbs up!

This sets the stage for a timely discussion around interest rates and investor behaviour.

Interest Rate Outlook

The Reserve Bank is scheduled to meet on May 28. ASB Bank anticipates a 25 basis point cut to the Official Cash Rate (OCR), with additional reductions expected in July and August. These cuts would primarily influence short-term interest rates, including floating, six-month, and one-year mortgage terms—potentially bringing them into the high 4% to low 5% range, depending on the term selected.
In contrast, longer-term fixed mortgage rates—such as the two-year rate—are more directly impacted by wholesale swap rates, which reflect the cost at which banks can borrow money. To illustrate the trend:

The Commonwealth Bank of Australia forecasts that the U.S. Federal Reserve will likely hold off on any rate cuts until July, allowing time for trade negotiations to evolve.

Implications for Borrowers

In practical terms, borrowers can expect to see short-term mortgage rates (e.g., six months to one year) trend lower. However, longer-term rates are unlikely to fall significantly in the near term—at least not until the latter part of the year.
Global uncertainty, particularly driven by international political developments, has dampened consumer confidence. With reduced government spending also on the horizon—signalled by Prime Minister Luxon's cautious fiscal stance—interest rates are expected to play a key role in driving any potential economic recovery.

Mortgage Structuring Strategies

For borrowers not planning to sell in the short term, there are two clear strategic options:

Alternatively, if you’re like Freddie Mercury and want it all, flexibility, balance, and medium term certainty, a split mortgage structure—blending short- and medium-term rates—can provide both immediate value and long-term stability.

Investor Behaviour: A Key Performance Driver

Despite recent volatility, we’ve seen minimal client movement toward more conservative investment options. This suggests a strong understanding among our clients of long-term investment principles, which we take some pride in supporting through ongoing education.
It’s important to remember: market conditions are always temporary. Whether markets are surging or struggling, history tells us that neither condition persists indefinitely.

Ultimately, investor behaviour remains the most influential factor in portfolio performance.
To position yourself for long-term success:

Disclaimer: This newsletter is meant to be informative and engaging, hopefully not a cure for insomnia.  Please don't take this as personalised financial advice.  Discuss your situation with an Advisor.  This is where I need to say past returns are no guarantee of future returns.