Posts Tagged ‘OCR’

On Thursday 27 October Reserve Bank Governor, Dr Alan Bollard held the OCR at 2.50%, which was very widely expected.

Dr Bollard said:

Domestic activity has continued to expand at only a modest pace despite relatively strong commodity prices. More recently, domestic business confidence has fallen back somewhat. Further ahead, earthquake repairs and reconstruction in Canterbury are still expected to provide significant impetus for demand.

As foreshadowed at the time of the September Monetary Policy Statement, there is a real risk that the European sovereign debt crisis could cause a further slowing in global activity, putting downward pressure on New Zealand’s commodity export prices. The difficult international market conditions could also result in increased New Zealand bank funding costs over the coming year.

Annual headline CPI inflation continues to be above the Bank’s 1 to 3 percent target band. That largely reflects the one-off effect of last year’s increase in the rate of GST. September quarter inflation data suggest that, once GST and other one-off influences have passed, underlying inflation is settling near 2 percent.

Given the ongoing global economic and financial risks, it remains prudent to continue to keep the OCR on hold at 2.5 percent for now. However, if global developments have only a mild impact on the New Zealand economy, it is likely that gradually increasing pressure on domestic resources will require future OCR increases.”

What this means for property investors

The impact has been swift with Westpac dropping their 1 year fixed interest to 5.85%, and Kiwibank dropped all of their fixed interest rates to 5.65% for 6 months and 1 year, 5.89% for 2 years fixed, a special short-time only rate of 5.99% for 30 months, 6.39% for 3 years, 6.79% for 4 years and 7.19% for 5 years fixed.  These are all market leading or equaling interest rates.  It is a competitive market so expect some of the other lenders to move their interest down in the coming week.   This will continue the flattening of the yield curve which will be exacerbated by pressure on banks to maintain margins which in turn helps them maintain high credit ratings, in the wake of increased borrowing costs banks have.  Over the next few months most investors will probably continue to float and take shorter term fixed interest rates, but as the months roll on, increasingly more investors will switch to fixed rates with medium and longer terms.

No change in OCR

The Reserve Bank of New Zealand has just issued its September Monetary Policy Statement.  This was interesting as the RBNZ Governor, Dr Alan Bollard said:

If recent global developments have only a mild impact on the New Zealand economy, it is likely that the OCR will need to increase New Zealand’s suprisingly strong local economy remains largely at the mercy of developments in the troubled global economy and financial markets…

For now, given the recent intensification in global economic and financial risks, it is prudent to continue to hold the OCR at 2.5 per cent.”

This shows that whilst the New Zealand economy had performed “relatively well”, despite headline inflation increasing slightly since the last Monetary Policy Statement 3 months ago in June, we are increasingly part of a global economy and have terms dictated from overseas events.  With some leading French banks being given credit downgrades and other large European bank on negative ratings outlooks, and Greece looking like having a Sovereign bankruptcy, we have a volatile climate.  On speaking to leading financial commentator Bernard Hickey of Interest.co.nz over a beer on Tuesday night after our great debate at the Auckland Property Investors’ Association on the moot is property investment productive, he thought that there is even a chance that the OCR could drop.  I agree – however I think the status quo will be maintained for a while. However it is all just crystal ball gazing really such are the uncertain global macro-economic times we live in.  Dr Bollard acknowledged this with ”at the same time, however, global economic and financial risks have increased.”

On a micro-economic scale rents are rising in New Zealand on the whole slowly, with Auckland going up a bit faster on the back of increased demand from positive migration, and continued undersupply of new houses.

Unfortunately there have been another round of earthquakes in Christchurch earlier this afternoon.  The media coverage I use to track this Twitter, NZ Herald, Stuff, TVOne and TV3 news have all reported no deaths, but a lot more damage.  The eastern suburbs have again experienced severe liquefaction, and tens of thousands of people have had drains broken, freshwater mains break and power cut to their homes.  Below is a photo of some kitchen damage that incurred in today’s 5.5 Richter magnitude earthquake at 1:00pm (11km deep, 10km east of Christchurch) followed up with a 6.0 Richter magnitude earthquake at 2:20pm (9km deep, 10km south-east of Christchurch), and nine 3.5 or higher Richter magnitude earthquakes to hit Christchurch in the 6 hours since up to the time of writing.

This will be the final straw for many more proud Cantabrians who will move to Timaru, Ashburton, Auckland, Wellington, Nelson, Dunedin, Queenstown, Invercargill and other New Zealand regional centres, and a few who perceive the grass to be greener in Australia. What happened was money markets reacted by selling down the NZ Dollar, which is likely to be temporary.  Leading bank economists are predicting that the OCR will now rise later.  It may have been raised in late 2011, or early 2012.

As a result floating and short term fixed interest rates are far more likely to stay low longer.  This will help the rebuild of Christchurch and investors and home-owners alike all around the country.

Whilst this months OCR announcement and Monetary Policy Statement stated inflation is the fear, and the OCR is the tool the Reserve Bank of NZ will use to combat the effects of inflation.  It is hard place to be in the RBNZ as exporters are concerned about the historically high NZ dollar.

The Official Cash Rate (OCR) remains unchanged at 2.50%.  Interestingly the Reserve Bank noticed signs of a recovery particularly with commodity prices remaining strong and stated that inflation is a concern.  Since the OCR is the tool to fight inflation, this will rise, and the speed of the OCR rise will broadly match the speed of our great nation’s economic recovery.

Reserve Bank Governor Dr Alan Bollard said:

The outlook for the New Zealand economy has improved since the publication of the March Statement.

Economic activity has been significantly disrupted by the Christchurch earthquake. However, while many firms and households – particularly within Canterbury – continue to be adversely affected, it appears the negative confidence effect of the earthquake on economic activity throughout the rest of the country has been limited.

The early signs of recovery noted in the March Statement have continued. Despite some continuing signs of weakness in the world economy, commodity prices remain very strong and firms expect to increase their hiring and capital investment. Reconstruction in Canterbury is projected to add about 2 percentage points to GDP growth over 2012, and boost the level of activity for several years thereafter.

Despite the strong outlook for export earnings, household expenditure is expected to grow only modestly. Household debt remains very high and is expected to constrain retail spending and the housing market for some time. Continued fiscal consolidation will also act to dampen activity.

The New Zealand dollar has appreciated substantially over the past two months. This appreciation, supported by high export prices for primary producers, is negatively affecting other parts of the tradable sector, constraining rebalancing of the New Zealand economy.

Headline inflation is currently being boosted by recent increases in indirect taxes, food and petrol prices, and surveyed expectations of future inflation have edged up. Despite this, indicators of capacity usage and core inflation suggest underlying inflation remains constrained.

As GDP growth picks up, underlying inflation is expected to rise. A gradual increase in the OCR over the next two years will be required to offset this, such that CPI inflation tracks close to the midpoint of the target band over the latter part of the projection. The pace and timing of increases will be guided by the speed of recovery, but for now the OCR remains on hold.”

 

I have been preparing this week for the NZ Wealth Mentor Property Masterclass Event is on this weekend at our Newmarket, central Auckland offices.  It will be another great event, with very useful information for those looking to invest in property and those with property looking for further direction and wanting to accelerate their path towards financial freedom.

Residential Loan Expiry Dates at 31 March 2011

This is not a graph of NZ political parties in Parliament.  The excel doughnut chart I used to plot the data from the Reserve Bank gave me these colours as a default.  For the first time in a great many years there is a higher value of residential loans ($84.6 billion) on floating rates, than residential loans ($83.1 billion) on fixed rates.

There were only $35.9 billion of residential floating loans 2 years earlier in March 2009, and fixed interest loans with greater than two years to expire amount to less than $10 billion.  This will please the Reserve Bank hugely as the OCR will have much faster effect when it eventually rises (which in my opinion will not happen within at least the next 6 months).  The OCR is exceptionally strongly correlated to floating rates and short term (say < 18 months) interest rates.

Whilst the OCR was held at 2.50% by the Reserve Bank Governor, Dr Alan Bollard as was widely anticipated, the accompanying comments indicate that this rate will not change for quite some time (most economists are predicting early in 2012 for the OCR to rise, with a few picking a rise late this year).  The truth is that it is simply too far out in this turbulent economic climate to predict this correctly.

No surprises here that Dr Alan Bollard, the NZ Reserve Bank Governor left the official cash rate unchanged at 3.0%.  He noted in question time a slight improvement for future forecasts.  We need to remember that the Reserve Bank has three major functions:

• operating monetary policy to maintain price stability;
• promoting the maintenance of a sound and efficient financial system; and
• meeting the currency needs of the public.

In terms of monetary policy the overall goal is price stability, which is laid out in the Reserve Bank Act 1989 and defined and specified by a Policy Targets Agreement. Currently the Reserve Bank must keep CPI inflation between 1–3 percent, on average, over the medium term. This is a good thing on the whole as inflation is rising prices, meaning money is losing its value.

Today’s announcement:

Dr Alan Bollard said:

The outlook for the New Zealand economy remains consistent with the projections underlying the December Monetary Policy Statement.

Domestic economic activity was weaker than forecast through the second half of 2010. September quarter GDP declined unexpectedly, and retail spending appears to have fallen in the December quarter.

Forward indicators of activity have firmed somewhat. Trading partner activity continues to expand and New Zealand’s export commodity prices have increased further. Within New Zealand, business confidence, across a range of industries, has picked up and imports of capital equipment have grown. Furthermore, there are tentative signs that housing market activity has stabilised, after having trended lower for some months.

The recent increase in the rate of GST has caused headline CPI inflation to spike higher as expected, but underlying inflation remains comfortably inside the target band.

As noted previously, while interest rates are likely to increase modestly over the next two years, for now it seems prudent to keep the OCR low until the recovery becomes more robust and underlying inflationary pressures show more obvious signs of increasing.”

My prediction

On looking at the data and the monetary policy targets of the Reserve Bank, I think that they will defer raising the OCR until September 2011.  What this means for you is that you should consider floating, or if you get a good fixed interest rate discount a 1 – 3 year rate offers good value.  I am an advocate of an interest rate averaging strategy, to hedge future interest rate rises (or falls).

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.”

Floaters and short-term fixed rate borrowers can breathe a bit easier in the knowledge that their pockets will not be adversely effected, with the Reserve Bank today announcing that he will leave the Official Cash Rate (OCR) unchanged at 2.5 percent.  Reserve Bank Governor Alan Bollard said:

The New Zealand economy is recovering broadly as expected and growth is predicted to pick up further through 2010.

Trading partner activity has recovered more quickly than we expected. Growth in Asia has been particularly strong. Consistent with this, export commodity prices have increased close to their 2008 peak. At the same time, risks to the global outlook remain elevated.

Notwithstanding the impact of stronger than expected export earnings, New Zealand households remain cautious, with the housing market and household credit growth subdued. Similarly, business spending is weak and firms continue to reduce debt.

On balance, we continue to expect the New Zealand economy to recover in line with or slightly faster than our March Statement projection. Annual CPI inflation, which has been close to 2 percent for the past year, is expected to track within the target range over the medium term.

As previously indicated, we expect to begin removing policy stimulus over the coming months, provided the economy continues to evolve as projected. [emphasis added]

The increased wedge between the OCR and lending rates, as well as a steeply positive-sloped interest rate curve, is expected to make OCR increases more effective than in the past. Accordingly, these factors should reduce the extent to which the OCR will need to be increased relative to previous cycles.

My Interpretation and Predictions

I think that ANZ National Bank Limited’s Chief Economist, Cameron Bagrie’s prediction for no rise in the OCR until September 2010 to hold true.  This is because of the wording which I put in bold to emphasis it.  Governor Bollard has bought the Reserve Bank time, and now is very unlikely to raise the OCR to 2.75% at the 10 June 2010 OCR review. I believe that the recovery New Zealand is experiencing is going somewhat slowly and a lot of business owners, property investors and home owners are unfortunately still feeling the ‘pinch’.  As a result I also consider it slightly unlikely at this stage, that the OCR will be raised on 29 July 2010.  This fits into the time-frames that Governor Bollard suggested with his oft repeated statements early last year, that the OCR will not be raised “until the latter part of 2010″.

Source: http://reservebank.govt.nz/news/2010/3970584.html