The Reserve Bank of New Zealand (RBNZ) will end its interest rate hikes sooner than predicted in August due to an economic downturn and declining house prices.

This is according to Capital Economics, whose prediction that rate increases would then go into reverse next year goes against the central bank’s forecast that the official cash rate will edge higher to 2.5% by the middle of 2023, staying like that until the end of 2024 at least.

Although Capital Economics said the market was pricing in an official cash rate of 2.75% by the end of 2023, its New Zealand and Australia economist Ben Udy said the OCR hiking may end in August 2022, reaching 2%, before cuts started next year.

“We’ve pencilled in two 25 basis point rate cuts in the second half of 2023, from 2% to 1.5%. But if the bank lifts rates more aggressively than we anticipate, more cuts will be needed.”

Should these forecasts prove accurate, this indicates homeowners could be hasty in securing long-term fixed mortgage rates now. ASB Bank said concerns of rate hikes have led to a rise in mortgage holders choosing fixed rates of between three to five years.

The forecast from Capital Economics is based on house price rises coming to a halt and then declining by approximately 10% between mid-2022 and mid-2023.

Udy added that falling house prices would occur simultaneously with easing inflation and an uptick in unemployment, resulting in the central bank reviewing its OCR path.

However, only a moderate rise in the unemployment rate to 4.5% by the end of next year is forecast by Capital Economics, with its expected rate cuts next year to “come as a surprise for markets. That’s why we expect the New Zealand dollar to weaken from US$0.68 to US$0.62 in the years ahead.”