Will the Reserve Bank of New Zealand surprise borrowers with a dramatic cut to the Official Cash Rate on Wednesday? With inflation continuing to cool, most economists and mortgage brokers are betting on a cut of 25 basis points, taking the OCR to 5%, but there are calls for the RBNZ to take a more aggressive approach and drop the OCR 50 basis points to 4.75%.
Tella Mortgages chief executive Andrew Chambers polled mortgage advisers in his group and they are largely in the former camp. “And then another cut of 25 basis points in November, and that’ll be it for the year,” he told OneRoof.
Chambers said pressure on the Reserve Bank to act faster on rates has intensified but he didn’t believe Governor Adrian Orr would buckle. “I think the Reserve Bank’s going to say, ‘Better to show that we’re consistently coming down over time rather than do a knee-jerk, reactive thing’.”
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Retail banks have led the way in reducing interest rates. The first headline-grabbing cuts came at the end of July, following better-than-expected inflation figures. However, the August cut to the OCR started the race in earnest, with banks dropping mortgage rates almost daily. In the last 14 days, there have been 21 cuts, the bulk of which have been to the one-year rate, with one bank, the Co-operative Bank, dropping its one-year rate below 6%.
Chambers said the tumble in rates was good news for household finances, although most borrowers were still paying rates of around 6.25%. “People’s expenses have definitely tightened up. There’s less excess spending going on.”
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He believed borrowers should be thinking more about their next move, now that cheaper deals were on offer. “We’re probably not seeing consumers thinking enough about their rate strategy. I feel like everyone’s a little bit asleep in that respect.
“It is quite strange because these are good times for borrowers. Rates are dropping, and there’s a competitive marketplace. Their existing banks will look after them well if they push them to.”
However, some homeowners were fearful of rocking the boat. “They don’t want to risk upsetting anyone. ‘I don’t want people looking at my financials when I haven’t been doing too well the last couple of years’. That sort of thing.”
Chambers expects banks in the coming weeks to drop their three to five-year fixed-term rates. “If a bank gets a 4.99% rate out there, they’ll lock in customers and they’ll have them locked in for longer at a rate that may not be possible in six to 12 months.”
Chambers added: “The banks have got really strong margins. Whilst there’s not a lot of loan activity at the moment, it’s not at record highs. The banks are fighting to hold their balance sheets and hold their lending up.”
Of all the high street banks Kiwibank and BNZ are the most bullish. Kiwibank’s economists are calling for a 50 basis point cut to the OCR on Wednesday and again in November. “It takes up to 18 months for rate cuts to filter through the economy,” Kiwibank economists Jarrod Kerr and Mary Jo Vergara wrote. “We all love fixed rates. And fixed rates need time to roll off.”
Likewise the BNZ is leaning towards a larger drop than 25bps. “We have been increasingly pointing to the fact that October’s Monetary Policy Review could be a line ball call between a 50 basis point cut and a 25 [basis point cut]. Not cutting at all has never entered our minds. And a line ball call it is,” BNZ head of research Stephen Toplis wrote.
“In our opinion, we think the disinflationary information that we have received will dominate and that this will, ultimately, encourage the RBNZ to accelerate the easing process. The containment of inflation is the Reserve Bank’s goal. And the vast majority of the data now say that this objective has been achieved.”
Although Westpac is predicting slow and steady cuts, there is always the option they will be fast and furious, its economists noted. “Financial markets are pricing in a more aggressive easing cycle, with at least one 50bp cut priced in before the end of this year and the OCR expected to fall by around 200bps by mid-year. Our expectation is that the RBNZ will move in measured 25bp steps,” the bank’s economists wrote.
One factor behind that prediction is lingering domestic inflation. “Even though the cutting cycle is now underway, non-tradables inflation remains elevated, coming in at 5.4% in the year to June. Similarly, while the economy has been softening, it is not quite as weak as the RBNZ assumed back in August.
“Importantly, a key lesson from the pandemic is that monetary policy works and that rapid changes in interest rates can generate large changes in demand and inflation.”
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