The OCR has finally been cut, so what might happen next?

Monday, 19 August 2024

Lloyd Burr explains why there's always a difference between the Official Cash Rate (OCR) and the mortgage rates banks charge us.

Economists were “pounding the table” in favour of a cut to the Official Cash Rate, and the Reserve Bank finally delivered last week.

The central bank trimmed the OCR by 25 basis points to 5.25% on Wednesday, the first cut in four years.

It was big news for banks and boffins, but what does the rate cut mean for the rest of us? Here’s a rundown.

What is the OCR anyway?

The OCR drives the rate banks pay when they borrow from the central bank and is a major factor in the rates banks then charge customers for things like home loans, and pay for term deposits.

What happened after it was cut?

Banks reacted quickly ‒ really quickly ‒ to Wednesday’s announcement. Kiwibank cut some of its interest rates by 0.25% within a few minutes of the big reveal, followed swiftly by matching cuts from ASB and Westpac, and a 0.10% cut from ANZ.

BNZ was a little slower off the mark, taking until Thursday to announce 0.25% rate cuts, effective from Friday.

The Reserve Bank trimmed the Official Cash Rate by 25 basis points to 5.25% on Wednesday, the first cut in four years.

And what might happen next?

Economists are confident the OCR will keep moving lower over the next 12 to 18 months.

Kiwibank’s team, lead by chief economist Jarrod Kerr, said Wednesday’s move would be the first of many cuts.

“We were pounding the table in favour of a rate cut.

“We’ve spent a lot of time talking and agonising about the timing of the first move,” he said.

“And now that it is out of the way, we’re going to spend a lot more time talking about the magnitude ‒ and it’s the magnitude that matters most.”

Kiwibank, ASB and BNZ all expected to see multiple further cuts to the OCR in the coming months, as the RBNZ moved towards a neutral point of 2.75% to 3.25%.

“Mortgage rates, business lending rates have a long way to go, south. And so too do savings rates,” BNZ chief economist Mike Jones said.

What might that mean for mortgage rates?

When the RBNZ moves, banks tend to move with it. This graph shows how the OCR and average one-year fixed mortgage rate from banks compared between 1994 and 2024.

When the RBNZ moves, banks tend to move with it. That being the case, a 3% reduction (as forecast by economists) in the OCR over the next 18 moths or so should mean mortgage rates fall by a similar amount over the same period.

ASB chief economist Nick Tuffley said the pace of cuts would be dictated by how quickly inflation fell, and the RBNZ would continue to closely monitor the data.

“Putting aside the quest to perfectly predict every OCR move, the important message to our customers is that lending rates and deposit rates are on the way down and have further to go.”

This sounds like good news for borrowers. What might it mean for the property market?

Jones said the housing sector was likely to be one of the first to respond to falling retail interest rates.

“It’s fair to say housing stats will be watched more closely than usual as people scour for green shoots,” he said.

“There are stirrings in some of the anecdote and surveys, but we think the prognosis is more stabilisation than acceleration, for now.”

However, he expected to see a “hearty” bounce-back in July sales activity after the large Matariki holiday-related drop in June.