Posts Tagged ‘OCR’
Glenn Stevens, the Governor of the Reserve Bank of Australia (“RBA”) has just raised the Australian Offical Cash Rate 0.25% to 4.25%.
This is important to New Zealand as sadly we do tend to try to follow our big brother country and closest neighbour, Australia. Now we don’t have the same pressures as Australia do in terms of our economy still struggling a little bit. We are out of recession, but business is hardly booming. Unemployment is still high, and house prices are not taking off, and moving upwards as they did in 2009.
As a result on 29 April, our Reserve Bank Governor Alan Bollard will in all likelihood leave our OCR unchanged at 4.25%. On 10 June currently I am 75% confident that he will also leave the OCR unchanged. Unfortunately our economy is not currently as good as Australia’s economy, and nor has it been for quite a while.
RBA Governor Stevens was worried last week that house prices were “getting too high”, and in response to questions about inflicting pain on home owners and property investors through causing higher short and medium term rates:
Interest rates to most borrowers nonetheless have been somewhat lower than average…
With growth likely to be around trend and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average.”
New Zealand is very much a different country to Australia, and currently we have few inflationary pressures, cyclically high unemployment and very low house price growth, and an already high currency (higher interest rates tend to mean overseas investors buy NZ Dollars to invest for the good yields they can get), we have far less pressure on us to raise our interest rates.
See the NZ Herald article for more details.
So why are the long term fixed borrowing rates so much higher than shorter term rates at present?
5 reasons why there is such a difference now:
1. OCR doesn’t correlate well with long-term interest rates
2. Risk premium for OCR rises
3. Deposit rates:
4. Short-term wholesale funding:
5. Long-term wholesale funding:
Conclusion
The Reserve Bank Governor, Dr Alan Bollard has just announced that the Official Cash Rate (“OCR”) is to remain unchanged at 2.50%. This move was widely expected by economists. On discussions with my business banking contacts they say that they have already factored in a 0.5% increase into fixed rates by 30 June of this year.
Dr Bollard’s press statement interestingly said that:
the New Zealand economy continues to recover…
The economy is being assisted by both monetary and fiscal policy support…
If the economy continues to recover in line with our December projections, we would expect to begin removing policy stimulus around the middle of 2010.”
As a result I predict that the major banks will not change their floating rates, but perhaps edge up their 1 – 3 year rates a little bit further. The floating rates will rise when the OCR rises. I predict that the OCR will stay unchanged on March 11, April 29, but then rise by 0.25% on 10 June 2010.
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.
David Whitburn LL.B BSc – Property Mentor and market commentator
Well there have certainly been a number of changes in the market recently, with the OCR having dropped from its peak in this economic cycle of 8.25%, down to just 3.00%, and I believe it will drop a little bit further.
Just remember that the OCR was put up to 8.25% on 26 July 2007, and stayed that high until 24 July 2008 where 0.25% was shaved off to lower the OCR to 8.00%, and every 6 weeks since then we have seen cuts, including the 1.0% cut on 23 October 2008, as well as the massive 1.5% cuts on the 4th of December 2008 and the 29th of January 2009. These cuts made Thursday’s 0.5% cut to 3.0%, seem like a bit of a let down.
Whilst I feel for term deposit savers, and pensioners that have a lot of their money in term deposits, we are a nation of net borrowers, not net savers. Therefore lower interest rates are of benefit to the country. Take note that our OCR is far cheaper than those in developed countries of the world like the UK, USA, Japan etc. These changes to financial markets are interesting for us as property investors and/or home owners as our lender’s interest rates have come cannoning down.
Look at the current rates now and compare them with just 6 months ago. I was paying over 10.5% as a floating rate in September and most fixed rates were pre-fixed with a 9.x%. Now most rates are pre-fixed with a 6.x%, as well as several 5.x% rates too. The long term fixed rates look like outstanding value to me. I think that with the US 5 year swap rate at cyclical lows, and the 5 year fixed interest rates at levels not seen for 6 years in New Zealand, that it is a great time to fix your buy and hold investment properties for a long time. I am throwing my interest rate averaging schedules out the door, and I am fixing as much as possible for 5 years at 6.50%.
This is cheap money, and my business banking managers and brokers that I network with are saying that they are being inundated with requests to fix long. This will also mean that you have to hurry up, as the supply/demand argument will kick in, and banks will be able to charge more for the certainty that this 5 year fixed rate will offer you.
Don’t miss the boat on this one – get some interest rate and cashflow certainty and fix long today. Long term fixed rates will go up from here, not down on the most part. For those lucky enough to be with BNZ, consider their 7 year 6.79% (this is not a misprint, I do mean seven year) fixed interest rate. That is rate certainty out until 2016 when the market should be well recovered and booming by then. Note that if you are expecting an inheritance, redundancy payout or other lump sum, that you are best to keep a good portion of your borrowing on a floating rate or short-term fixed rate, to allow pay downs without incurring significant penalties.