As the Reserve Bank deliberated over a decision, we all sat waiting with bated breath.
What would the outcome be?
On Wednesday 8th May, we got the answer. The Official Cash Rate (OCR) was officially lowered to 1.5%.
Let’s look into why the Reserve Bank chose to make the decrease, what it means for you, and if the experts think it will drop any further.
Why The OCR Was Cut
The main reason behind the decision to lower the OCR was to strengthen New Zealand’s economy.
Since mid-2018, global economic growth has slowed. This has seen foreign central banks ease their lending policies to promote the prospect of growth. This move is simply the New Zealand Reserve Bank following suit. By lowering the OCR and giving greater lending possibilities, it is thought it will give our economy the boost it needs.
Recently, New Zealand has seen reduced population growth, the softening of house prices in some areas, ongoing low business confidence, restrained investment, and employment nearing maximum sustainable level.
All of this means the OCR cut was needed to keep employment and inflation consistent. This will help the country achieve the right objectives and gives a balanced outlook for interest rates.
What It Means For You
Unfortunately, the cut is expected to lead to a drop in our dollar. That could mean higher prices on key items that are imported into New Zealand, namely fuel.
But the news is not all bad. When it comes to interest rates, the news is good. Major banks have already responded with a reduction to floating fixed term interest rates. Lower mortgage rates obviously mean that you have to pay less interest when borrowing for your home. This provides a great opportunity for new home buyers to enter the market and for existing mortgage holders to pay more off their principal debt.
The sub 4% mortgage rates which first made an appearance last year look to become a regular long term feature in the market. The major banks all have 2 or 3 year rates below the 4% threshold.
But, lower mortgage rates also mean lower deposit interest rates. This could be bad news for people with term deposits and who rely on compounding interest rates. Economists fear that a lower return on savings could cause people to explore riskier investment options instead. If you are considering other investment options, we strongly recommend seeking solid financial advice to ensure it is the right move for you.
Will It Fall Further?
The jury is out on this one currently. Even the Reserve Bank are 50/50 on whether or not another OCR cut will happen. It will depend on whether they are satisfied with growth and inflation. If they feel the economy needs another boost, the rates could fall even further later in the year.
Many of the banks believe that the rate will be cut further this year in order to have a meaningful impact on the economy. They feel this cut is just the first step and another will be taken later in the year. They do feel that the Reserve Bank will heavily consider whether another cut it required before rushing into a decision though.
However, Westpac economists feel that this cut, coupled with the decision to rule at a Capital Gains Tax will be enough to accelerate the housing market and recover the economy. They are expecting a big boost to the property market. Because people will be able to borrow more at lower rates, they feel it will encourage movement in the housing market and house prices will rise again.
With new options out there in the lending market, it has never been more important to seek professional advice from a Financial Adviser. Here at Mortgage Suite, we are happy to help you explore the options available and what is the best course of action for your individual situation. Get in touch with us today.
