Shock OCR pumps more life into mortgage wars and squeezes savers.


Reserve Bank Governor Adrian Orr bucked expectations with a shock 50 basis point (bps) Official Cash Rate (OCR) cut on August 7th. Double what the market expected it sent economic commentators and bank pricing committees into a spin.

"This was a stunning decision," Westpac chief economist Dominick Stephens said.

50 bps movements are rare and have traditionally been used off the back of major global or domestic events such as the GFC and after the Christchurch Earthquake.

Despite declining business confidence and building economic headwinds fueling uncertainty, commentators viewed the cut as out of kilter with underlying indicators and felt it risked creating more uncertainty.  

Business NZ chief executive Kirk Hope said the cut "did not seem to relate to current inflation or unemployment data" and business confidence would be better supported if the Reserve Bank focused on "a conservative, principles-based, no-surprises approach to monetary policy".

The Reserve Bank justified the cut, stating “GDP growth has slowed over the past year and growth headwinds are rising. In the absence of additional monetary stimulus, employment and inflation would likely ease relative to our targets.”

The Bank sees a low interest rate environment working in tandem with increased central government spending to support a pick-up in demand. Business investment is expected to rise given low interest rates while increased construction activity also contributes to the pick-up in demand.

However the jury is well and truly still out on whether a lower OCR will push the productive economy forward. BNZ's head of research Stephen Toplis:  "We are far from convinced. It is our view that the cost of debt is not hindering investment activity in the slightest.

Where to next?

Most commentators see business confidence remaining low, inflation sitting within its target band and continued global uncertainty around Trump's trade war with China, meaning there will be continued downward pressure on the OCR.

ASB chief economist Nick Tuffley put forward their position forecasting a further 25bp cut to 0.75%, in November, stating Global risks around US-China tensions and added Brexit uncertainty.

What does this mean for borrowers?

Residential borrowers would have no doubt been jumping for joy seeing the size of the cut.

Floating rates headed down quickly across the board led by ASB who were first out of the blocks passing the full 50 bps through on their floating rate. Fixed rate reaction was a little more mixed with some banks making some smaller cuts and others leaving several key fixed rates as they were initially.

As we moved past ground zero and bank pricing committees found their feet, more cuts followed with records low rates grabbing headlines.

The situation is fluid and we are keeping a very close eye on what's on offer. If your customers are trying to make sense of all the headlines and various rate offers get in touch and we can provide a clear picture of where things stand daily.

For existing homeowners this is obviously good news giving them an opportunity to feel a little extra cash in their pocket with lower repayments or hunker down and pay off their mortgage faster. We can have those conversations with your customers and ensure they are making decisions based on the right information, especially those on fixed rate mortgages who have several things to weigh up when looking to chase a lower rate.

Politicians and those struggling to afford their first home might not be as excited, as more cheap credit washing into the housing sector could re-start faster house price inflation.  

Savers and retiree’s.

This is the classic double edged sword for every winner saving money on a mortgage there is a loser earning less on savings and term deposits.

Deposit rates are falling with treasury leading the way cutting the KiwiBond interest rate to 1.0%. Banks haven't been quite as tough with interest.co.nz analysis showing banks had cut term deposit rate offers by an average of -21 bps by the middle of the month. 

Reserve Bank Governor Adrian Orr has encouraged those with capital to put it to work, which is aimed at encouraging productive investments into the economy to help drive growth.

However, not all savers are investment savvy and this type of message can push some savers into riskier investments they do not fully comprehend, so its import as a sector that we are encouraging people to seek the best advice on alternative investments.

Despite the tough times faced by property investors with more stringent LVR restrictions than residential buyers and increasing compliance costs,  the lower interest rates and lack of yield from traditional bank investments might create some new energy in this market which we will be watching closely.

Renters.

It’s a mixed bag for renters. Rental increases, while still up year on year fell month on month which could finally indicate a slow down of what have been steadily increasing rental prices over a number of years. The lower rates provide an opportunity for some to make the jump into home ownership, but at the same time meager returns on savings will see deposit growth from interest slow further. The kiwi dollar dropping on the back of the OCR announcements won’t help with the cost of imported goods and services so buying power could decrease, making it harder to save also.