After taking the official cash rate down from a peak of 5.5% to now sit at 2.25% the chances are near 100% that this is as easy as monetary policy will get this cycle. Having been in the business of scrutinising and picking monetary policy changes for almost four decades, what happens now is attention turns to when interest rates start going back up again.

On that point the view I have to give is fairly much the same as I’ve been delivering for some time now. Underlying inflationary pressures in New Zealand are far higher than they should be after the extended period of policy crunch. The chances are firm that the Reserve Bank will begin moving their cash rate back up before the end of 2027.

How soon is impossible to pick this far out. But for interest rates other than the most short term and floating ones fluctuations in views on when tightening starts will have some big impacts – pushing these interest rates upward.

This process has already started. Consider for instance the cost to a bank in New Zealand of borrowing money at a fixed rate for three years in order to lend it out at a fixed rate for the same term. That rate peaked at 5.10% in October 2023 and spent 10 months easing to 3.7% before the Reserve Bank started cutting its 5.5% cash rate.

Now, it looks like this rate bottomed out at 2.6% in the middle of October and currently is near 3.05%. It has risen almost half a cent despite the cash rate falling 0.75% since early-October because it reflects market expectations for where monetary policy will head over the next three years.

Bank borrowing costs for fixed rate lending are already rising, bank term deposit rates will likely start creeping up for the mid to longer terms early next year, and there is a chance that before Christmas bank fixed mortgage rates for terms longer than one year will begin their cyclical climb.

Can we pick how rapidly interest rate returns to investors will rise? Again, near four decades of experience in this business gives me a clear answer of no. Every easing and loosening cycle is unique and this time around we have to make guesses as to the impacts of US tariffs, AI, escalating construction costs, spending plans of different generations, and ever-changing sensitivity of householders to changes in interest rates.

Can we at least pick when interest rates will peak and at what levels? Again, no. No mainstream forecaster this cycle expected the cash rate to fall to 2.25%. But it seems reasonable to think that the next tightening will take the cash rate eventually back up to 5.5%. Maybe that will happen come 2028-29.

Where do I think the risks lie? Inflation bumping up to uncomfortable levels more quickly than people including the Reserve Bank expect. Consider that the economy has shrunk 1.1% in the year to June, job numbers in September were 0.6% down from a year earlier, but inflation has retreated only to the top of the target range at 3%.

Near twice the average net proportion of businesses say they plan to raise their selling prices once the economy is stronger. On average households think inflation will be over 5% in two year’s time. Plus house prices have begun to rise again.

For investors in fixed interest assets the challenging times of low returns are coming to an end and there is a chance returns a year from now will be stronger than currently assumed by many.

This article has been provided for general information only. Tony Alexander is an independent economist and produces a free weekly publication with a housing focus called "Tony's View". You can sign up at www.tonyalexander.nz