Mortgage Rates Tipped To Fall Further
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The Reserve Bank has made a bold move to support New Zealand’s struggling economy, cutting the Official Cash Rate (OCR) by 50 basis points to 2.5 percent. The decision exceeded some expectations, with the market divided between a 25 or 50 basis point drop.
The Monetary Policy Committee (MPC) signalled that more cuts could be on the way, depending on how inflation and growth evolve. “The committee remains open to further reductions in the OCR as required for inflation to settle sustainably near the 2 percent target mid-point in the medium term.”
It said it had considered a smaller cut but felt that the risks of doing too little were greater. “A larger reduction in the OCR could mitigate this risk by providing a clear signal that supports consumption and investment.”
The rate cut is already flowing through the financial system. Major banks including ANZ, Westpac, BNZ, Kiwibank and ASB have announced changes to mortgage and deposit rates. BNZ dropped its standard variable rate from 6.29% to 5.99%, while Kiwibank reduced several lending and deposit rates.
Economists say this move should help ease financial pressure on households. “A 7.5 percent mortgage rate really hurt most households with debt,” said Kiwibank’s Jarrod Kerr. “We're down into the high four percents and we'll be into the low fours soon enough.”
BNZ’s Mike Jones noted floating rates would likely move quickly. “Fixed rates have been coming down in anticipation, so that'll limit how much of a reaction we see.”
The Reserve Bank’s decision follows weak GDP figures, with a 0.9 percent contraction in the June quarter. While there were signs of modest growth in the September quarter, the MPC admitted there may be more slack in the economy than expected.
The cut is also expected to keep the New Zealand dollar weak. “We're cutting faster than overseas, so that is going to weigh on the exchange rate,” said Infometrics’ Gareth Kiernan.
Finance Minister Nicola Willis said the rate cut would soon be felt by households and businesses. “For mortgage holders, it means that they'll switch on to lower interest rates and have more choices about their spending,” she said.
Property data firm Cotality said the immediate impact on house prices would be small, with banks already adjusting fixed rates ahead of the announcement. But economist Kelvin Davidson said the 50-point cut was “probably seen as the least-regrets option.”
Markets now expect a further 25 basis point cut at the next review on 26 November.