Reserve Bank cuts Official Cash Rate to record low to combat COVID-19

Following on from the Reserve Bank of New Zealand’s (RBNZ’s) announcement that it was reducing the Official Cash Rate (OCR) to 0.25 percent we thought you’d appreciate our opinion again on where interest rates might be heading now for borrowers.

Governor Orr’s decision to reduce the OCR has been influenced by the global economic slowdown associated with the Coronavirus disease (COVID-19). Most of the world is reliant nowadays on China for its manufacturing capacity and factory closures in mainland China are causing a shortage of goods worldwide. This is starting to impact consumer spending globally. For countries like New Zealand whose economy relies significantly on tourism the cessation of an increasing number of international flights will see less money been spent here. As a country we look set to be in for a sustained period of economic downturn until the new COVID-19 travel restrictions are lifted.

The Reserve Bank has also announced this morning that the new capital holding increases for banks scheduled to be introduced in July have now been postponed until July 2021. This has been done to enable banks to pass on more of the OCR cut now than what they might of if they had to hold additional capital in only a couple of months’ time. We applaud the Reserve Bank for taking this step in this time of increasing economic uncertainty.

While the “lower-for-longer environment” looks increasingly certain for lending rates going forward, it looks certain to be tempered by the fact that the COVID-19 outbreak will eventually run its course and things will return to normal. We see little potential impact also on house prices in New Zealand. With so few houses listed for sale around the country demand is still outstripping supply and house prices continue to rise with property investors returning to the market as deposit rates are very unattractive.

Banks have already moved quickly this morning to pass on the full OCR cut to their floating rates but as of this moment we have not seen cuts made to the short-term fixed rates. All banks last week had already moved to reduce their longer-term rates in anticipation of the Reserve bank reducing the OCR. The banks are all very much aware that lowering their short-term rates further for borrowers will impact the interest rates that are available for depositors. Bank deposits provide much of the funding needed for banks to lend out money, so they are cautiously reviewing deposit rates to balance the needs of savers and borrowers.

With the above in mind borrowers would be wise in our opinion to secure some of the very good longer-term fixed rates below 4% now available with 20%+ equity. Whilst lending rates look set to remain at their current historic lows for the immediate future, we believe the amount of discounting been applied by banks to their lending rates will decline. We are facing unprecedented economic conditions as a country, but things will return to normal in time.

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 to secure a good deal.

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