The Current Financial Position Explained – February 2020
The OCR
This month, the Reserve Bank revealed they have decided to keep the official cash rate (OCR) on hold at 1%. There have been promising signs of economic growth with employment at its maximum sustainable level and inflation close to the 2% target range.
They expect this growth to continue into 2020 with indications of strong government investment, increased infrastructure and higher household spending.
However, it is not all smooth sailing. “Soft momentum in economic growth has continued into early 2020. Slower global growth over 2019 acted as a headwind to domestic growth. In addition, competitive pressures and recent subdued business confidence have suppressed business investment.
The global economic environment has shown signs of stabilising and trade tensions have receded somewhat. However, the Covid-19 (coronavirus) outbreak is an emerging downside risk.” [source]
At this stage, the “Reserve Bank’s forecast OCR track now has no further cuts pencilled in, and has a hike forecast for 2021.” [source]
So, what does all that mean for mortgage rates?
Interest Rates
The news is not new that interest rates are low. In fact, they have been low for the last 12 months. But, will they continue to stay this way?
The Reserve Bank has recommended that they do. “Low-interest rates remain necessary to keep employment and inflation around target.” [source]
At this stage, New Zealand’s economists predict that the rates will remain low throughout this year and next. They believe, “the Reserve Bank will hold off raising the OCR for a couple of years, with rates rising to a high of 2.25% in the coming cycle.
The bank expects a “series of mild hikes” from 2022 after a long period of low rates for borrowers. If correct, the prediction could see mortgage rates hover around current levels for the next 18 months.
The bank still expects NZ and global interest rates to remain “historically low”, with policy rate cuts from other central banks this year.” [source]
At this stage, the RBNZ has pencilled an increase of 25 basis points in 2021, with a further increase of 75 basis points by the end of 2022. So, it looks like low-interest rates are here to stay for a bit longer yet.
What Are The Banks Doing?
For the last year, banks have constantly been at war to secure mortgage customers by competing on who can offer the lowest rates. It has worked out pretty well for borrowers. But, that could be about to change.
KPMG’s latest financial report “suggests the RBNZ’s new capital regime could prompt an end to the “mortgage war” triggered by OCR cuts last year.” [source]
“The report suggests last year’s OCR cuts, notably the 50 basis point cut last August, gave banks more “wiggle room in their margins to drop rates and compete on price and volume”. It described the resulting mortgage war as an “unintended consequence” of the rate cuts, “just after house prices had stabilised”.
The report predicts upward pressure from the central bank’s new capital rules.” [source]
Basically, it means that borrowers should not count on rates remaining this low forever. However, the “mortgage wars” that have been taking place will probably mean that rates are unlikely to skyrocket just yet.
Right now is the best time to check your financial position to see if your current borrowing is right for you or if a review is needed. You can also explore if any new borrowing is on the cards so that you can get into your first home while the interest rates are low.
Get in touch with us here at Mortgage Suite to find out what is the best financial option for you and your family today.