Mortgage rates fall and dollar dives as Reserve Bank sends cash rate down to record 1% low

Wednesday, 7 August 2019

What does the official cash rate mean?

The Reserve Bank has slashed the official cash rate to a fresh record low of 1 per cent, sending mortgage rates down and the New Zealand dollar tumbling to a three-year low.

The cut is double the 0.25 percentage point cut that had been widely expected by analysts.

ASB reacted within minutes, announcing its variable home loan rate would fall by 0.5 percentage points to 5.2 per cent on August 14 for new customers, with existing customers getting the benefit a week later.

BNZ also announced it would cut its floating mortgage rate by 0.5 per centage points to 5.3 per cent, and both banks cut their two-year fixed rates by 4 basis points to 3.75 per cent.

The New Zealand dollar reacted strongly, falling by more than 1.5 US cents to just under US64 cents in late afternoon trading.

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Prime Minister Jacinda Ardern said the cut was good news for home owners.

'We are in an environment where unemployment is low, we see wages are increasing, and this cut will ultimately mean New Zealanders should face lower interest rates.

'Looking globally you see this is not unlike some of the moves that are being seen around the world,' she said, noting the cut brought the New Zealand official cash rate into line with Australia's.

The rate cut would stimulate those looking to invest 'and that is obviously what the governor of the Reserve Bank is trying to drive', she said.

National Party finance spokesperson Paul Goldsmith said the 'historic cut' sounded a dramatic warning that the New Zealand economy was slowing 'and the Government needs to get serious about growth'.

Economic consultancy Infometrics said the Reserve Bank had taken a 'chainsaw to the economic outlook'.

But Ardern said the fundamentals of the economy were strong.

ANZ said the size of the rate cut surprised everyone 'with no analysts expecting such a large move', but still forecast another drop in the cash rate to 0.75 per cent in November.

Explaining the rate cut, Reserve Bank governor Adrian Orr said 'yeah, part of the message is wake-up, go and spend'.

It was 'easily within the realms of possibility' that the Reserve Bank might have to use negative interest rates in future, but the bigger rate cut now reduced the probability, he said.

The Reserve Bank released its latest quarterly monetary policy statement on Wednesday.

The Reserve Bank's monetary policy committee said recent economic developments were 'broadly as expected and employment was around the targeted maximum sustainable level'.

It also said it was pleased to see that labour market data released on Tuesday had 'held up relative to expectations'.

But it noted inflation remained below 2 per cent and said the outlook for employment and inflation was softer.

'GDP growth had slowed and global conditions had weakened.'

The Reserve Bank said it debated the relative benefits of reducing the OCR by 25 basis points and communicating an easing bias, as opposed to cutting the OCR by 50 basis points now.

'The committee noted both options were consistent with the forward path in the projections' but reached a consensus for the 0.5 percentage point cut.

The larger initial monetary stimulus would 'best ensure the committee continues to meet its inflation and employment objectives', it said.

Orr said global economic activity continued to weaken, easing demand for New Zealand goods and services.

'Today's decision does not rule out any further action,' he said, when asked whether the bigger-than-expected cut meant rate cuts that had been forecast by analysts for later in the year would not now happen.

But commenting on the pace of cuts, he said the Reserve Bank had become increasingly convinced over the past few days that ''sooner', was a safer strategy to achieve its objectives than 'slower for longer''.

ASB said it would also cut its Orbit home loan rate by 0.45 percentage points to 5.3 per cent.

The bigger-than-expected rate cut is worse news for savers.

ASB said it was 'limiting the interest rate reduction' on its Savings on Call accounts, which currently only pay 0.1 per cent interest on savings under $25,000 anyway, to 5 basis points.

In what may prove a more representative change, Kiwibank will cut the interest it pays on its 'Notice Saver - 32 days' savings accounts from 2.1 per cent to 1.7 per cent and on its 'Notice Saver - 90 days' accounts from 3.1 per cent to 2.7 per cent.

Kiwibank also announced a 0.5 percentage point cut to its floating-rate and revolving mortgages.