Mortgage rates fall on suggestion official cash rate could drop

Wednesday, 27 March 2019

A Reserve Bank warning that the next move in the official cash rate is likely to be a cut is already proving good news for borrowers.

Kiwibank cut its five-year home loan rate after the Reserve Bank indicated a change in outlook on Wednesday.

In the latest review of the official cash rate (OCR), the central bank left the benchmark rate at 1.75 per cent, but said emerging conditions meant 'the more likely direction of our next OCR move is down'.

Economists had not expected the central bank to soften its position so thoroughly.

Upping mortgage payments by $10, $20, or $30 a week makes a huge difference to the time it takes to repay the loan, and the total interest paid.

* Outlook murky for interest rates as biggest bank slashes predictions

* Banks hit savers first when interest rates are falling

* Co-operative Bank says hoarding of OCR cut by rivals 'not justified'**

Kiwibank chief marketing officer Mark Wilkshire said the bank was cutting its five-year rate by 80 basis points to 4.29 per cent, which would take effect on Monday.

'Market conditions have allowed for a price change and we are being quick to pass on this benefit to New Zealanders. This change enables us to offer lower rates for the longer-term.'

Commentators said other banks could follow.

ASB chief economist Nick Tuffley said he expected the OCR cut to happen this year. 'If so, wholesale rates have scope to fall a little further, though there are already 40 basis points of cuts built into wholesale rates. So there is some potential for retail mortgage and deposit rates to fall slightly further over the year.'

Claire Matthews, a banking expert at Massey University said some rates had already been cut in anticipation of the announcement. 'If the market becomes more certain that the next move will be a reduction in the OCR, and before the end of the year, a further reduction in fixed rates is likely. The floating rate won't move until the OCR actually changes.'

But Infometrics economist Brad Olsen said there did not seem to be much further for retail rates to fall generally.

ANZ, BNZ and Westpac already have special rates of 3.99 per cent for two years.

Economists hadn't expected the central bank to soften its position so much.

'Interest rates are already low, but it doesn't appear that businesses are willing to invest even with the historically low rate remaining stuck at 1.75 per cent, anyway. If businesses were going to invest because interest rates are lower, they'd have already done this, and investment would be looking much better. As it is, investment growth is much slower than it should be given the accommodating monetary policy.

'We have commented before that, absent any external shocks to the economy, there is likely to be a lack of pass-through in interest rates and a limited stimulatory effect on investment. A cut now would also squander New Zealand's capabilities to respond to a future economic shock. This view remains.'

Olsen said the Reserve Bank would be better to hold on to the possibility of a cut in case of a major global downturn.

'Given the time taken for a lower OCR to affect investment decisions, it almost appears that this decision to signal a cut as the next move is too little too late, given business investment has been soft for the past year.'

He said it was possible the signal of a potential cut could also just be convenient timing given the Reserve Bank's proposal to increase banks' capital requirements, which is likely to increase borrowing costs. A cut in the OCR in future could mitigate the effect of the increased capital requirements.