Forecasting where interest rates on the likes of mortgages and investments would go used to be a relatively straightforward exercise many years ago. One would take a view on where the economic cycle was headed, consider the starting point for inflation, then predict what the central bank would do.

Nowadays the exercise is so fraught with uncertainties that all predictions for where rates will go need to be treated with caution.

For one thing, the predictions we economists make tend not to be able to factor in structural shifts brought about by such things as the role of the internet, spreading use of AI, changes in international trade rules etc. The old relationships between a change in the pace of economic growth and a change in inflation don’t necessarily operate the same way these days.

Then there are the shocks to consider. Maybe it’s a global pandemic, maybe a central bank realising it has eased too much or too little, or maybe it is the biggest shock to global oil supplies ever seen.

All of these things mean that while interest rates will still tend to follow the economic cycle, the speed and magnitude of changes can often surprise us.

At the moment in New Zealand we have an upturn in the economy underway which was already causing interest rates to rise from late-October last year. The Middle East war from February 28 added extra upward impetus to these rate rises but with restraint also from the denting of the pace of economic growth this year.

Now, with oil prices substantially lower than where they have been for the past three and a half months, the outlook for our economy has improved once more. That means although inflation risks have eased, the direction of change for NZ interest rates is still going to be upward.

How high might interest rates go? Before answering that question, it is best to remind oneself of this. At the start of the last monetary policy tightening cycle late in 2021 the Reserve Bank predicted that its official cash rate would rise from 0.25% and peak at about 2.5%. The peak instead was 5.5%.

At the moment there is quite a spread of views on where the current 2.25% cash rate will go to. The common view is somewhere between 3% and 4% with the Reserve Bank pencilling in 3.25% come late-2028.

For borrowers it means some further increases in mortgage rates lie ahead but probably not taking rates back to where they were in 2024. That means for investors the interest rates able to be earned probably will not go back to the levels achieved back then.

What about the timing of interest rates rising by another 1% or so from current levels? There is a good chance that when the Reserve Bank next reviews its cash rate on July 8 they will raise it to 2.5%. However, our central bank has an established record of raising interest rates too slowly then raising them too much, then cutting them too slowly and ultimately by too much.

It is too early to say whether this pattern of behaviour will change under the new Governor and there is a clear risk that the Reserve Bank takes some heart from the recent falls in energy prices and decides to hold fire to see how things pan out. That means the first rate rise might be delayed until September 2 if not potentially the end of October.

Regardless, putting issues of highly uncertain timing to the side, the direction of change for interest rates in New Zealand looks like being upward for the next couple of years, but not at the pace seen following the end of the pandemic.

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