RBNZ slashes OCR to record-low 2%

The Reserve Bank of New Zealand has cut the OCR by 25 basis points to a record-low 2%

The Reserve Bank of New Zealand has today reduced New Zealand’s Official Cash Rate by 25 basis points, from 2.25% to 2%, falling in line with economists’ predictions of a cut.

In a statement, Reserve Bank Governor Graeme Wheeler cites a number of contributing factors for the cut to New Zealand’s OCR, including: influence on New Zealand Dollar of global growth being below trend and concerns about financial stability due to inflation in the housing market.

Long-term interest rates are at record lows and the prospects for global growth and commodity prices remain uncertain, political risk is also heightened, Mr Wheeler says.

Further explaining New Zealand’s economic state, Wheeler says:

“The high exchange rate is adding further pressure to the export and import-competing sectors and, together with low global inflation, is causing negative inflation in the tradeable sector.  This makes it difficult for the Bank to meet its inflation objective.  A decline in the exchange rate is needed.

“Domestic growth is expected to remain supported by strong inward migration, construction activity, tourism, and accommodative monetary policy.  However, low dairy prices are depressing incomes in the dairy sector and reducing farm spending and investment.  High net immigration is supporting strong growth in labour supply and limiting wage pressure.”

RBNZ states that annual CPI inflation is predicted to weaken in the September quarter, reflecting lower fuel prices and cuts to ACC levies. However, annual inflation is expected to rise again in the December quarter, due to policy change, the strength of the domestic economy, reduced drag from tradeables inflation, and rising non-tradeables inflation.

 

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RBNZ cut mirrors decision in Australia

RBNZ’s rate cut decision mirrors the Australian Reserve Bank cut on 3 August, from 1.75% to 1.5%. To mixed reaction from the finance sector, Aussie banks have not passed on the full rate to borrowers, instead increasing rates for term deposits.

In a media conference following RBNZ’s announcement, Wheeler said he “would like to see most of [the rate cut] passed on” by the banks.

However, he said the decision is ultimately up to the banks – who are competing for term deposits – and whether they want to have lower lending rates or to attract more term deposits.

RBNZ never considered 50 basis point cut

In the media conference, Wheeler said there was “no serious consideration to a 50 basis point cut.

“We didn’t think it was justified [because the] economy is forecast to grow,” Wheeler said.

OCR cut should mean good news for borrowers

Cash rate cut good news for borrowers

CANSTAR New Zealand general manager Jose George says today’s cash rate cut is unsurprising; given RBNZ’s July economic update was reasonably bearish, but that it could be good for borrowers.

“The RBNZ had to weigh up the benefits of a weaker exchange rate over the risks of increasing price pressures in the housing market,” George says.

For those with a current mortgage, of course, the rate cut is good news. Based on the current average variable home loan rate on CANSTAR’s database, a 25 basis point cut would reduce monthly repayments on a $400,000 home loan by almost $60 per month.

Overall, here’s the difference a 25 basis point cut in average variable home loan rate would make to mortgage holders with a 25 year loan, at different loan amounts:

Loan Amount $600,000  $550,000  $500,000  $450,000  $400,000  $350,000  $300,000
Interest Rate 5.63% 5.63% 5.63% 5.63% 5.63% 5.63% 5.63%
Years 25 25 25 25 25 25 25
Monthly Repayment $3,731.25 $3,420.31 $3,109.38 $2,798.44 $2,487.50 $2,176.56 $1,865.63
Loan Amount $600,000  $550,000  $500,000  $450,000  $400,000  $350,000  $300,000
Interest Rate 5.38% 5.38% 5.38% 5.38% 5.38% 5.38% 5.38%
Years 25 25 25 25 25 25 25
Monthly Repayment $3,641.65 $3,338.18 $3,034.71 $2,731.24 $2,427.77 $2,124.30 $1,820.83
Monthly Difference $89.60 $82.13 $74.67 $67.20 $59.73 $52.27 $44.80

Source: canstar.co.nz. Figures based on home loans listed on Canstar database. Based on a loan term of 25 years, does not take into account any fees.

Borrowers won’t see full benefit if NZ follows Australia’s lead

“Something that’s very interesting to note, though, is the behaviour of Australia’s banks earlier this month when Australia’s Reserve Bank cut its official cash rate by 25 basis points, to a low of 1.50%.

“All of Australia’s major banks – and the majority of the smaller banks as well –retained at least one-third of the official rate cut. All four major banks cut home loan rates for owner-occupiers by between 10 and 14 basis points, and of the 30 smaller Australian institutions that have announced home loan rate cuts thus far, only four have passed on the full 25 basis points. Overall the average reduction in the owner-occupied standard variable home loan rates announced in Australia thus far has been 13 basis points,” George says.

If New Zealand’s banks took this approach, mortgage holders would see just over half those monthly home loan savings. The approximate savings for mortgage holders would be as follows:

Loan Amount $600,000  $550,000  $500,000  $450,000  $400,000  $350,000  $300,000
Interest Rate 5.63% 5.63% 5.63% 5.63% 5.63% 5.63% 5.63%
Years 25 25 25 25 25 25 25
Monthly Repayment $3,731.25 $3,420.31 $3,109.38 $2,798.44 $2,487.50 $2,176.56 $1,865.63
Loan Amount $ 600,000  $550,000  $500,000  $450,000  $400,000  $350,000  $300,000
Interest Rate 5.50% 5.50% 5.50% 5.50% 5.50% 5.50% 5.50%
Years 25 25 25 25 25 25 25
Monthly Repayment $3,684.52 $3,377.48 $3,070.44 $2,763.39 $2,456.35 $2,149.31 $1,842.26
Monthly Difference $46.73 $42.83 $38.94 $35.04 $31.15 $27.26 $23.36

Source: canstar.co.nz. Figures based on home loans listed on Canstar database. Based on a loan term of 25 years, does not take into account any fees.

Great news for savers under Aussie approach

“Interestingly, a number of banks in Australia have moved to increase long-term (1, 2 and 3 year) term deposit rates, which is great news for savers. It’s not entirely surprising as Australia’s banks are pressures of regulatory reform and global funding markets, now and coming soon.  It will be interesting though, to see if New Zealand’s banks follow suit.”

RBNZ hints at further cuts

Along with RBNZ’s 25 basis points cut today, its statement hints at further cuts in the future, saying its monetary policy will, “continue to be accommodative”.

“Our current projections and assumptions indicate that further policy easing will be required to ensure that further inflation settles near the middle of the target range. We will continue to watch closely the emerging data,” Wheeler says.

 

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