OCR decision suits borrowers

The outlook for borrowers is looking bright with the Reserve Bank holding the official cash rate (OCR) at 2.75% last week and likely to cut it to 2.50% on December 10.

Compared with the previous three reviews of the OCR, there were few people last week expecting a rate cut from governor Graeme Wheeler.

BNZ chief economist Tony Alexander said expectations of a cut had been falling in recent weeks in response to a pullback in worries about how much the New Zealand economy was slowing.

Spending using debt and credit cards had lifted to an 8.2% annualised growth rate recently. Consumer and business sentiment measures had improved, although the latter remained low. Most significantly, international dairy prices had recovered strongly.

A rate cut could not be ruled out because of the disinflationary effects of the kiwi's rise in the past few months, weakening Reserve Bank expectations of an import pricing feed through into higher consumer inflation, slowing wages growth, some cooling in the Auckland housing market and ''actual'' inflation sitting at only 0.4%, Mr Alexander said.

''Personally, I thought at a pinch, the Reserve Bank would complete the job of removing the 1% official cash rate rise of last year, but they left the rate unchanged at 2.75% while noting `some further reduction in the OCR seems likely'. So maybe on December 10 there will be another, probably final, cut.''

Given the no change decision met market expectations, there was little impact on wholesale interest rates, he said. The main rate relevance to floating interest rates - the 90 day bank bill yield - was 2.94% after having been 3.5% in May and 3.7% a year ago.

Of relevance to funding costs for fixed rate loans, the two year swap rate was near 2.8% from 3.5% in May and nearly 4% a year ago.

The 1.2% fall in that rate in the past year explained the fall in the two year fixed home lending rate from 5.75% in October last year to 4.69% just over a year ago. The intensity of competition for mortgage business explained the subsequent decline in that rate to a record low of 4.39%, Mr Alexander said.

''If I was borrowing at the moment, I would take the two year rate because it is so very, very low compared with past rates.

It gives more rate stability than simply fixing one year, it is much lower than rates for longer terms and fixed rates may only decline a small amount more from current levels if the Reserve Bank cuts the official cash rate again.''

BNZ strategist Kimberly Martin said the Reserve Bank was seen as a ''reluctant cutter'' given its ongoing concern about the Auckland housing market.

However, it was likely the bank would keep the OCR at a 2.5% low for a prolonged period following December 10.

''We see it as unlikely the Reserve Bank will raise the OCR again before 2017. By this time, both we and the Reserve Bank see CPI inflation having picked up to well within the bank's 1% to 3% target range. Borrowers can expect to enjoy historically low floating rates for some time yet.''

Short dated wholesale fixed rates had traded in a fairly tight range in recent weeks. They priced a further 0.25% OCR cut by March next year and that the cash rate would be virtually unchanged throughout 2016, she said.

If the Reserve Bank was to cut in December, the response of short end fixed rates would be determined by the bank's accompanying statement. If it maintained an easing bias, short end fixed rates could trade lower.

But if the bank moved to a neutral stance, the market might start pondering when the central bank would start its next rate lifting cycle.

Overall, there was no great urgency to fix short end rates and there was only limited probability of rates moving much below current levels.

Last week, the United States Federal Reserve was also in the spotlight, Ms Martin said. It made clear December was still very much a ''live meeting'' for a potential first interest rate rise in nearly nine years.

The BNZ expected US rates might continue to rebound from lows if a December rise remained a possibility.

Currently, New Zealand five year wholesale fixed rates remained less than 0.25% above floating rates.

Those might be considered attractive by those who feared the risk rates would rise. They would also appeal to borrowers who valued having certainty in their interest rate exposure at only limited upfront cost.


At a glance

• Two year fixed rate looks the best bargain for borrowers.
• Borrowers can expect to enjoy historically low floating rates for some time yet.
• No urgency to fix short end rates.
• Five year rates still attractive for those wanting certainty.


 

 

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