Economists tip 0.5% Reserve Bank cut but still room for disappointment

Wednesday, 9 October 2024

A 50bp cut is likely, but no sure thing, most banks believe.

Borrowers’ hopes will be justifiably high that the Reserve Bank will cut the official cash rate by 50 basis points to 4.75% at 2pm today, but some banks are warning there is still a chance of a disappointment.

All the major banks are forecasting the Reserve Bank will announce a 50bp cut both today and at its subsequent meeting on November 27.

Kiwibank effectively pre-empted a cut of that size on Tuesday, on the eve on the central bank’s monetary policy review.

It announced it would cut its own floating mortgage rate to 7.75%, from 8.25%, later this month, in what was viewed as a clever but bold marketing move.

But ANZ believes it is effectively a coin toss between a 25bp cut and 50bp cut for the Reserve Bank, and a research note put out by BNZ on Monday also described its decision as a “line ball call”.

Market pricing on debt markets had eased back to imply only a 60% chance of the full 0.5% rate cut, “so still tilted for a 50bp move, but not quite to the same extent as was the case last week”, it said.

The proportion of borrowers with skin immediately in the game has increased.

CoreLogic chief property economist Kelvin Davidson said mortgage holders had been migrating to shorter-term loans as they grew to anticipate steep rate cuts ahead.

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

That would mean any changes to the OCR could potentially feed through to the economy faster than if a higher proportion were borrowing on longer fixed terms, he said.

In December, only 36% of new mortgage borrowing was taken out on fixed terms of up to and including 12 months, with the majority opting for longer-term loans.

But by August that had flipped, with a record 68% of new borrowing taking place on shorter-term fixed rates.

“Our analysis suggests that existing borrowers who are rolling over their loans onto a new fixed rate will have been behaving in a very similar way to new borrowers,” he said.

“The Reserve Bank’s figures show that the share of existing loans that are currently fixed but due to change mortgage rates within the next 12 months has now risen back to about 66%, matching a peak previously seen in the first half of 2021.”

In hindsight — and demonstrating the difficulties of second-guessing the market — most borrowers back then would have done better fixing for longer, he noted.

“Anybody who bucked the trend and took out a five-year rate of about 3% at that time will still have about 18 months to run at those ultra-low rates.”

Something of a milestone had been passed, with people now rolling off one-year loans able to refix for another year at a lower rate.

But Davidson said that even though interest rates appeared to be on the way down, job losses meant financial stress amongst mortgage borrowers might not have peaked.

The proportion of mortgages that were at least 90 days in arrears had edged up to 0.6%, the highest figure in more than a decade, he said.

“Mortgage stress will remain a factor to watch for some time to come yet and is another reason to be cautious about the size and strength of any upturn in house sales and prices as we head into 2025.”