What an OCR cut could mean for your mortgage and the property market

Monday, 25 November 2024

The Reserve Bank is making a decision on the official cash rate on Wednesday.

It currently sits at 4.75% and following the cut in October banks immediately dropped interest rates.

Economists are predicting another 50 basis point cut.

After a frenzy of interest rate cuts following the last official cash rate drop in October - can we expect the same to happen this week?

On Wednesday afternoon the Reserve Bank will announce if it has decided to lower the official cash rate (OCR) from 4.75%.

When the OCR dropped 50 basis points (bp) in October interest rates at most major banks dropped almost immediately.

And with economist widely predicting we will experience another 50bp for the final OCR review of the year, what can we expect will happen with mortgage rates and the property market?

Infometrics chief forecaster Gareth Kiernan said a 50bp cut was essentially already priced in by financial markets, so he would expected the effect on fixed mortgage rates to be limited.

“You might see fixed mortgage rate cuts of about 10 basis points come through in the week following the OCR review, while floating rate movements tend to match the OCR, so they’d be likely to drop by 50 points,” he said.

But if the Reserve Bank went for a 75bp cut, what would happen would depend on whether financial markets thought the Reserve Bank was bringing forward the timing of future expected cuts, or whether they thought it was effectively signalling there will be more cuts than previously expected.

“Either way, I would expect it to add at least another 10 basis points to fixed rate cuts in the next week, but it could lead to rates being lowered by as much as 40 basis points in total,” he said.

But the complicating factor on financial markets over the last one to two months was that wholesale swap rates for terms of two years or over had lifted substantially, by between 20 and 40bps. A swap rate is the rate based on what the markets think interest rates will likely be in the future.

“Although wholesale rates are only at their highest levels in 3-4 months, it looks like a definite shift in sentiment from the downward trend we’ve seen since the end of May.”

Kiernan said it was partly driven by international factors, with the re-election of Donald Trump raising concerns about stimulatory or inflationary fiscal policy in the US, and partly by domestic factors as markets see signs of the NZ economy starting to emerge from the zero growth of the last 24 months.

“This shift in wholesale markets is thus placing some upward pressure on retail rates for 2+ years, which mostly hasn’t been passed on by the banks yet. The upshot is that, unless there is another change in the trend in wholesale markets, the lift in wholesale rates over the last couple of months is likely to limit the pass-through of any OCR cut – even a larger-than-expected one – into longer-term mortgage rates.”

And if you’re currently on the hunt for a property right now, Mark Macky, chief executive of Bayleys Real Estate Group said a further OCR drop will give the market more confidence that we’re through the bottom of the cycle.

“Listings are at historically very high levels at present, we would expect to see more deals being done as buyers can make decisions with more confidence and be helped by lower borrowing rates.

“We are not expecting to see home values to increase any time soon. Buyers aren’t seeing prices increase, they’re just having more confidence to make offers. There is a lot of property on the market at the moment, and until this balances out we are not seeing pressure on pricing in the coming months,” he said.

A further OCR drop will also make it easier for first home buyers to enter the market, he said.

“Mortgage rates contribute strongly to affordability, and anything that can help first home buyers into the market has to be a good thing.”

But he did not expect a lower OCR, and therefore potential lowering mortgage rates, to make the property market boom.

“It will make mortgages more affordable which makes it easier for buyers, but there is still a lot of pain in the economy and we are not expecting the market to boom any time soon.

“It will give buyers more confidence to make a decision, and we should see an increase in sales volumes and the total supply of listings will slowly ease down from the current record levels.”