OCR to Remain at 1% – so What Now?

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OCR to Remain at 1% – so What Now?

The Reserve Bank surprised economists this month when it announced that it will keep the Official Cash Rate (OCR) at 1%, despite broad expectations that it would be dropped to a low of 0.75%. So how exactly will this affect the market, is it the end of record-low mortgage rates and an affordable market?

The Reserve Banks Decision

The RBNZ’s Monetary Policy Committee commented that they were happy with how the original surprise cut from 1.5% to 1% in August had affected the market, and believed it would continue to do so, “The Committee debated the costs and benefits of keeping the OCR at 1.0% versus reducing it to 0.75%. The Committee agreed that both actions were broadly consistent with the current OCR projection. The Committee agreed the reduction in the OCR over the past year was transmitting through the economy and that it would take time to have its full effect.”

But some fear that the decision will see banks increase their lending rates, which RBNZ Governor Adrian Orr said that decision will be up to the retail banks to decide, “Really, they have to make commercial business decisions about what they want to do with their customers.”

The Banks Reaction

 The banks were equally surprised by the Reserve Banks’ decision, and have indicated that the fixed mortgage rates have potentially hit their lowest point in this cycle, and lenders will more than likely consider “balance sheet risk management” over the coming months, as borrowers refix their mortgages. 

ASB’s latest economic report suggests borrowers enjoyed “a perfect storm” of favorable lending conditions in the run-up to the Monetary Policy Statement (MPS), “The mortgage rate cuts made in October coincided with a bout of global risk aversion that dragged NZ interest rates lower as well as the local market pricing in an OCR low of 0.5%.”

Kiwibank economists Jarrod Kerr and Jeremy Couchman have predicted that lending rates are likely to rise “a little” from here in response to the decision, which could be a problem for the Reserve Bank if this decision backfires on them. The Reserve Banks’ primary goal in lowering their interest rates is that it will hopefully encourage people to borrow more and spend more to stimulate the economy, but if banks respond to the RBNZ’s decision to take a breather from cutting the OCR by increasing their rates, the RBNZ’s could find themselves right back at where they started.

ASB Chief Economist Nick Tuffley pointed out the RBNZ was now starting its three-month, summer “hiatus” until the next OCR review with wholesale interest rates markedly up, and the risk that mortgage rates start to lift just as the seasonal spring upswing in housing activity hits its straps.

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Daniel Vernon