David Whitburn

Posts Tagged ‘New Zealand OCR’

Dr Alan Bollard, New Zealand’s Reserve Bank Governor stated earlier today that the Official Cash Rate will remain unchanged at 3.0%.  He said that had made this decision even before the September 4 Canterbury earthquake struck.  Here’s Dr Bollard’s full statement:

Reserve Bank Governor - Dr Alan Bollard (source: www.scoop.co.nz)

While the global and domestic economies continue to recover, the outlook has weakened since our June Statement. We consider it appropriate at this point to keep the OCR on hold.

The earthquake that struck Canterbury on 4 September has significantly disrupted economic activity and is likely to continue to do so for some time yet. Many homes and businesses have been damaged, as have significant parts of Canterbury’s public infrastructure. Eventual reconstruction and repairs will require considerable resources over the next year or two, particularly in the construction sector. If, in the aftermath of the earthquake, the prices of some goods and services increase temporarily, monetary policy would remain focused on the medium-term trend in inflation. The Policy Targets Agreement explicitly instructs the Bank to look through temporary price increases generated by a natural disaster.

Looking more generally at the domestic economy, the household sector remains cautious, with consumer spending soft, house sales falling and house prices remaining flat. With continued soft demand for credit, this suggests household spending will not increase to the extent previously projected.

The pace of expansion in the global economy appears to have slowed in recent months with forward indicators of US growth, in particular, deteriorating noticeably. Nevertheless, continued strong growth in Australia and China will support demand for New Zealand exports, reinforcing the continued contribution of high export commodity prices.

Overall, despite the weakened outlook, we still expect that growth will progressively absorb current surplus capacity over the next few years. In addition, changes to indirect taxes and earthquake impacts will cause headline inflation to spike higher over the coming year. Previous experience of GST increases, the fact that annual CPI inflation has been near 2 percent for the past year and a half, and the subdued state of domestic demand suggest this inflation spike will have little impact on medium-term inflation expectations.

Over time, it is likely that further removal of monetary policy support will be required. The pace and extent of further OCR increases is likely to be more moderate than was projected in the June Statement.”

The Forex markets treated this result strongly with the NZD:USD currency pair being slashed by 0.8 cents in the couple of hours post the announcement, before regaining a small part of this loss.  Dr Bollard went on to say that he thinks the peak of the OCR rises this interest rate cycle will be at 4.70%, and there are still a number of pressures on New Zealand’s economy so growth and our economic recovery are very slow. As a result we can interpret this by saying that with rising unemployment and other pressures in terms of more deleveraging to come, interest rates are likely to stay lower for a while to come, asset prices are likely to stay lower for a longer period of time, credit is still difficult to get, businesses, farms and individuals are still reluctant to borrow and spend money.

There will still be more mortgagee sales to come, and vendors in many areas need to get real and stop listing their properties for too high amounts (some agents are buying listings as they are desperate to get listing which such a low volume of sales) if they want them to sell anytime soon.  I know that there are people wanting to sell who are not able to as they would be in negative equity and unable to discharge their mortgages, or not wanting to sell as they believe (rightly so in my considered opinion) in the medium and long term that they will get a much better price.  Combined with the difficulty many purchasers have in raising finance with the current tough credit criteria, and probably more significantly a general reluctance to take on debt and instead choosing to ‘save and prosper’, we will have far less listings and sales, and many areas not getting much net migration will continue to go slightly backwards slowly but surely.

For property investors, the bad news is:

• depreciation cuts come in shortly on 1 April 2011,
• finance is harder to get (for many investors with larger property portfolios),
• GST rises kick in on 1 October affecting rates, repairs & maintenance and management fees, and
• house prices aren’t bolting up any time soon.

The good news for property investors is:

• rents are going up,
• surveys from the New Zealand Property Investors’ Federation state that tenants expect rents to go up,
• interest rates will stay lower for longer,
• interest rates are not expected to be where they were in 2008 (9.x% fixed, over 10.5% floating) in the foreseeable future,
• the sun will rise tomorrow, the day after tomorrow and every day after that – property values will rise in the long-term,
• there are some good positive cashflow properties available in main cities right now.

Source: Reserve Bank Website – http://rbnz.govt.nz/news/2010/4182378.html

The OCR has been raised today by 0.25% to 2.75%.  This is the first movement in the OCR since 30 April 2009, and the first raise since 26 July 2007 (when it was at a massive 8.25%).  Expect floating and short-term interest rates to go up.

Here’s what Reserve Bank Governor Alan Bollard said as report on the Reserve Bank website:

The economy has entered its second year of recovery with growth becoming more broad-based.

The recovery in trading partner activity is continuing, with growth in Asia particularly strong. Along with ongoing growth in Australia and recovery in the United States, this has so far offset weak growth in some other export markets. Against this backdrop, New Zealand’s export commodity prices have increased sharply over the past few months, boosting export incomes.

In contrast to signs of global economic recovery there has been renewed turmoil in financial markets. Currently, we expect the main impact on New Zealand to come through continuing upward pressure on the cost of funds to the banking system.

In New Zealand, growth of around 3½ percent is expected this year and next. The main drivers of this outlook are higher export prices and volume growth, an improving labour market and a pick-up in residential and business investment. However, we expect households to remain relatively cautious, with the housing market and credit growth staying subdued. This moderate household spending contributes to some rebalancing in the economy.

Underlying CPI inflation is expected to track within the target range even as the economy expands further. That said, headline CPI inflation will be boosted temporarily by the announced increase in GST and other government-related price changes. Provided households and firms do not reflect this price spike in their wage and price-setting behaviours we do not expect a lasting impact on inflation.

“Given this outlook and as previously signalled, we have decided to begin removing some of the monetary policy stimulus that is currently in place. The further removal of stimulus will be reviewed in light of economic and financial market developments.

The fact that bank funding costs are higher, long-term interest rates are higher than short-term interest rates, and a greater proportion of borrowers use floating rate mortgages should all reduce the extent to which the OCR will need to be increased relative to previous cycles.”

Members should take note that the Reserve Bank today (30 April 2009) reduced New Zealand’s Official Cash Rate (OCR) from 3.0% to 2.5%, with Reserve Bank Governor Alan Bollard commenting:

“Overall, developments since March point to lower medium-term inflation than previously projected. The main factors behind this are weaker global growth, and an unwarranted tightening in financial conditions via both higher long-term interest rates and a stronger exchange rate than expected.  Global financial markets have showed some tentative signs of stabilisation since the March Monetary Policy Statement and governments in the major economies are continuing to make progress in resolving their banking system difficulties. However, a large amount still needs to be done and sentiment remains fragile. Negative feedback from the global recession could also still adversely affect financial institutions. The world economy deteriorated further than expected in the first quarter of 2009. While monetary and fiscal policy responses in many countries have been substantial and there are some signs of stabilisation in some countries, we still expect the adverse economic forces generated by the crisis to remain dominant throughout 2009. The timing and extent of global recovery remain highly uncertain. While the New Zealand economy has not experienced the same extreme falls in economic activity as seen in a number of our trading partners, it remains weak. Business sentiment is low, investment has been curtailed and employment reduced. We expect the large decline in the OCR over the past year to pass through to more borrowers over coming quarters as existing fixed-rate mortgages come up for re-pricing. This, together with the stimulus from fiscal policy, will act to support the New Zealand economy and eventually see activity trough and pick up thereafter. However, the scale of the global financial crisis and domestic adjustments underway are such that it is likely to be some time before economic activity returns to robust and healthy levels.

We consider it appropriate to provide further policy stimulus to the economy. We expect to keep the OCR at or below the current level through until the latter part of 2010. The OCR could still move modestly lower over the coming quarters.”

We have seen numerous cuts since the OCR peak in this interest rate cycle at 8.25% where it stood for a year until 24 July 2008.  This year we have had 2% cut off it alone with the 12 March policy announcement being a 0.5% cut, and the January 29 policy announcement being an unprecedented 1.5% cut.  The encouraging words from Dr Bollard are that there are “more in the pipeline” indicates a far deeper recession than previously contemplated, so like other Central Banks in the world he will try to stimulate the our economy with lower interest rates for business and household lenders.  This will flow onto lower interest rates for investors.  Other Reserve Bank heavyweights Tim Hampton and John McDermott were also present answering questions with Dr Bollard.  Sometime they mentioned which is important to consider is that to be competitive in International Captial Markets we can’t be like the US Federal Reserve, Canadian Reserve Bank and Bank of England who have 0.5% of lower equivalents to the Official Cash Rate.  I am predicting at this early stage only a 0.25% cut in the OCR at the next 6 weekly policy announcement on 11 June 2009, which is also where the 3 monthly Monetary Policy Statement will be presented.

While the New Zealand economy has not experienced the same extreme falls in economic activity as seen in a number of our trading partners, it remains weak. Business sentiment is low, investment has been curtailed and employment reduced. We expect the large decline in the OCR over the past year to pass through to more borrowers over coming quarters as existing fixed-rate mortgages come up for re-pricing. This, together with the stimulus from fiscal policy, will act to support the New Zealand economy and eventually see activity trough and pick up thereafter. However, the scale of the global financial crisis and domestic adjustments underway are such that it is likely to be some time before economic activity returns to robust and healthy levels.
Dr Bollard stated that “we consider it appropriate to provide further policy stimulus to the economy. We expect to keep the OCR at or below the current level through until the latter part of 2010. The OCR could still move modestly lower over the coming quarters.”

We have seen numerous cuts since the OCR peak in this interest rate cycle at 8.25% where it stood for a year until 24 July 2008.  This year we have had 2% cut off it alone with the 12 March policy announcement being a 0.5% cut, and the January 29 policy announcement being an unprecedented 1.5% cut.  The encouraging words from Dr Bollard are that there are “more in the pipeline” indicates a far deeper recession than previously contemplated, so like other Central Banks in the world he will try to stimulate the our economy with lower interest rates for business and household lenders.  This will flow onto lower interest rates for investors.  Other Reserve Bank heavyweights Tim Hampton and John McDermott were also present answering questions with Dr Bollard.  Sometime they mentioned which is important to consider is that to be competitive in International Captial Markets we can’t be like the US Federal Reserve, Canadian Reserve Bank and Bank of England who have 0.5% of lower equivalents to the Official Cash Rate.  I am predicting at this early stage a final 0.25% cut to the OCR in this economic cycle at the next 6 weekly policy announcement on 11 June 2009, which is also when the 3 monthly Monetary Policy Statement will be presented.

Westpac have already slashed 0.4% off their 6 month rate, and I understand all major lenders are reviewing their interest rates today.  The effect of this announcement is likely to pull down the floating, 6 month, 1 year rates, and 2 year fixed term rates and perhaps a trimming to the 3 year rate, as Dr Bollard in an unusual move suggested that the rates would remain low until at least the end of next year.  This strongly implies for the next 18 months that rates will not rise from where they are now.  Expect to see more cuts to the short term fixed rates and floating rates from various lenders today!

What Should I Do About This?
I would encourage all members to review their current loan portfolio and to work out an interest rate and loan strategy with their brokers or bankers.  It will be interesting to watch good sites like http://www.goodreturns.co.nz/mortgage-rates.html to get up to date interest rates, and www.sorted.org.nz to see the reaction to the Reserve Bank’s move to state they expect interest rates to be low until the end of 2010.  This move was possibly learned from the Reserve Bank of Canada where they found a way to impact longer term fixed rates (which Dr Bollard is frustrated by them rising).  In an unorthodox move they stated that they would not raise the OCR until at least the 2nd quarter of 2010.  We have implied no rise in the OCR at least from current levels until the end of 2010.  Watch and hope for medium term interest rates to fall with this significant level of certainty.

Interest costs are typically the greatest expense for property investors, so I look forward to hearing from the Deputy Reserve Bank Governor Dr John McDermott at the Auckland Property Investors’ Association meeting in July this year.  It will be great to understand where various interest rates are heading and why.