Despite the prevailing narrative, it is still possible interest rates could fall further this year while the Kiwi dollar rises, says Pie Funds chief investment officer Mike Taylor.

The RBNZ cut the Official Cash Rate by 50 basis points (to 3.75%) at its last meeting and suggested there were likely another 50 basis points of cuts to come.

With the cuts priced in, many experts have warned that the potential is limited for fixed mortgage rates to fall much further from here.

But slowing global growth has the potential to upend that narrative, Taylor said.

Meanwhile, with the New Zealand economy headed into recovery mode it was possible that the dollar – which has fallen sharply in recent months – may have hit the bottom for this cycle.

“Most major banks have a 4 in front of their two and three-year rates,” Taylor said.

“So, if you’re sitting there with a 6.5% or 7% mortgage and you can now refix at 4.95%, that’s going to give you some relief.

“That sort of additional stimulus of 150 to 200 basis points off your mortgage will help.”

The general feeling at the moment was that we had probably hit bottom for the economy, and we should start to see some pickup in the next three to six months, Taylor said.

However, international trends pushing bond yields higher have been putting limits on the ability of local banks to pass through rate cuts.

Concerns about the prospect of US President Donald Trump’s tariff policies and tax cuts pushing US inflation higher have dominated market thinking – keeping US rates higher for longer.

“At the moment, the Fed’s essentially on hold,” Taylor said.

“However, there are indications now that global growth and particularly US growth might be slowing.

“Call it what you want, but between Elon Musk and Donald Trump, there’s a bit of chaos occurring in the White House.

“I suppose that’s what they want.”

But that was causing businesses and consumers to hold back a bit on their spending.

“So we’re seeing an expectation that US growth will slow from maybe 2.5% to 1.5% this year.

“That’s good news if you’re expecting interest rates to fall because that will put less pressure on rates, maybe inflation won’t rise as much as possibly we’re expecting.”

The Fed may continue to remain dovish and, if global rates continue falling then maybe RBNZ could potentially take the OCR to 3% or under, Taylor said.

There were other geopolitical issues pointing to subdued growth, he said.

The Trump administration was putting a lot of pressure on European nations – and others – to boost their defence spending.

“That defence money has got to come from somewhere and it’s probably going to be taken out of the general fiscal spending budget,” Taylor said.

That would mean less money in the pockets of citizens and consumers.

“It’ll be great if you’re running defence companies in aerospace and that area, but for everybody else, less money flowing through the system.”

That did point to slightly weaker economic growth throughout the world this year, he said.

Meanwhile, commodity prices such as oil were looking subdued.

“You’ve got a potential peace deal in Russia and Ukraine, and you’ve got ‘drill, baby, drill’ [the Trump policy], so more supply coming from the US as well as weaker growth.

“That all tends to lead me to believe that oil prices will be lower and so lower oil prices will have an impact on inflation and it’s hard to see inflation running back to 5%  in this scenario.”

Dollar dive

The Kiwi dollar has fallen steadily against the US dollar in the past few months.

But it may have finally hit bottom, Taylor said.

“We’re trading now at the sort of Covid lows, between 55 and 57c against the US dollar. The only time that I can recall in my career that’s been lower than that was around 2000 to 2002, when it was trading in the 40s. I don’t think we’re in that scenario.”

The market was now pricing that New Zealand was coming out of recession and that we were at the bottom of the rates cycle on a forward-looking basis, he said.

“So I think probably that there’s an upside to Kiwi.”

It was certainly the case that the US currency had become a favourite for traders in response to Trump’s policies.

But it was so popular it made him inclined to take a contrarian position, he said.

“I could see the Kiwi back above 60c in the coming months.”