Historic OCR Cut

Economists had been predicting the Reserve Bank would cut the Official Cash Rate (OCR) in August. But none had predicated that the cut would be quite so much. The general consensus was that the OCR would be lowered by 25 basis points. However, the Reserve Bank shocked everyone when they cut the rate by 50 basis points instead, bringing it to a historically low 1%!

This is the biggest cut we have seen since March 2011. We knew the cut was coming as the result of ongoing slow economic growth and global concerns. But why was it so much?

It seems that the Reserve Bank has chosen to get on the “front foot” and take drastic action now in the hopes of boosting the economy. Many believe this drastic action has already started working. “There has been a massive drop in the rates that really matter for the economy and those are the fixed mortgage rates. The Reserve Bank has engineered that by convincing people that they are going to keep interest rates low for a long time.” – Westpac’s Dominick Stevens

But that does raise the question of where to from here? Will we see further cuts in the future? The prospect of future cuts is highly likely. Many economists are expecting the OCR to fall below 1% as early as the end of this year or in 2020. We will have to watch this space!

What Will Happen To Interest Rates?

With the OCR plunging, what does that mean for interest rates?

Kiwibank economist, Jarrod Kerr believes “If things get worse [the Reserve Bank] could deliver another cut in the next meeting, if not it will be a 2020 story. The main message here is rates will be lower for much longer and there’s a good chance interest rates will continue to fall over the next 6-12 months.”

The banks have already reacted, slashing both fixed and floating rates. All banks have floating rates between 5.15% and 5.3%, and their fixed rates are all 3.75% or below for one and two-year options. We can see the impact of the slashed OCR already. It seems lower interest rates are definitely here to stay for a while yet.

Property Market Update

“One outcome of increasingly lower interest rates – and the concurrent search for yield – will be that New Zealanders will, once again, start looking to property as an investment, Stephens added.

I am absolutely of the view that the housing market will respond to these low interest rates, despite policy constraints like the foreign buyers ban. So I think we are looking at about 7% growth over the next year.

If it does respond, the first thing we would see is an increase in sales and there is tentative evidence of a pick-up in sales now. But we will see over the next six months.” – Westpac’s Dominick Stevens

Another thing that is boosting the prospect of sales is, according to a recent survey conducted the low interest rates are changing the affordability of New Zealand housing. Income affordability is improving, median house prices are increasing at a slower rate than last year, mortgage interest rates have declined by an average of 0.44 percentage points, and salaries have increased by 2.8% on average.

All of this adds up to positive news for the property market. So if you are considering a first home, upgrading from your current home, or investing, then now could be the time to do it! Get in touch with us here at Mortgage Suite, to see what your options are.