Reserve Bank lowers OCR to new record low – keeps options open.

Following on from the Reserve Bank’s announcement last Thursday 10th November that it was reducing the Official Cash Rate (OCR) to a record low of 1.75% we thought you’d appreciate our opinion again on where interest rates might be heading. At this time we hope you and your family have not been impacted by the earthquake and aftershocks been experienced.

No real surprise with this latest reduction made to the OCR. This had been expected by the market given New Zealand’s stubbornly higher dollar and inflation remaining incredibly low. We look back with some irony now to 2014 when Governor Wheeler thought it wise then to raise the OCR by a full 1% to combat the threat of non-existent inflationary pressures. Many New Zealanders including ourselves will welcome his departure from The Reserve Bank next year. Hopefully his replacement will be a lot more in tune with New Zealand’s economy.

So where to for borrowers now? With this latest cut made to the OCR the banks have been quick to blame the rising costs of funds as an excuse not to pass on additional rate cuts now to both fixed and floating rates. It’s important to stress that the reason for the rise in bank funding costs is the Reserve Bank and it making the banks hold more money now on deposit against the money they lend out. With deposit rates currently unattractive to savers many Kiwis would rather purchase an investment property. As a consequence the banks are going offshore and these funds are costing them more thus their margins that they cherish so dearly are been squeezed. While it’s a business decision by the banks themselves whether or not they increase or decrease their interest rates we note with some cynicism the continuing profits they all continue to make. The Reserve Bank ultimately though is the instigator for why banks aren’t passing on in full the OCR cuts to customers with mortgages. On one hand Governor Wheeler wants interest rates lower in New Zealand to drive inflation up and our dollar down (hence this latest cut made to the OCR) yet on another he is forcing the banks to hold more money against loans they write now but they can’t attract enough depositors here as people wisely see much better returns in property.

The Reserve Bank making the banks hold more money on deposit now is in our opinion an overkill as the New Zealand banking system has been very robust right through the GFC and banks here have simply not been lending excessively to people who cannot afford new mortgages. Given this pressure on banks to hold more money on deposit we have likely seen the end of interest rates reducing. There could still be some more downward movement ahead but not much.

So it’s either a case then of the status quo and flat rates for the next 12 months or some small increases coming next year. If the new US President elect follows through on his promise to significantly upgrade US roads and infrastructure this would drive up inflation in America and this would have a flow on effect to interest rates for us here in New Zealand. If you see yourselves in a property for a while then you might like the certainty now of a longer-term rate perhaps or you may still be just comfortable to play the short-term game like many people are doing. With so many variables it is now very hard to predict where rates will be sitting in 12 months’ time. Any increases when they come would be small and measured though as our current exchange rate and level of inflation in New Zealand simply doesn’t support significant increases in the cost of borrowing.

A new recent development is that the Reserve Bank’s request to have available debt to income restrictions in its “tool box” looks to have had cold water poured on it by the Government. We welcome this news as it appears our politicians have realised the significant impact that this would have on most New Zealanders ability to borrow a mortgage. Common sense seems to have prevailed.

In conclusion if you are at all concerned about the possible direction of interest rates and the rate that you are currently sitting on with your bank please contact us. We can then negotiate with your bank for you

Simon Rule

By Simon RuleSimon Rule on Facebook

Simon is one of Wellington's leading mortgage & insurance brokers with over 20 years experience in the financial services industry. He was asked to speak at Parliament in 2008 on the issue of housing affordability and remains a vocal proponent of the relaxation of "red tape" associated with the construction of new homes.

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