Posts Tagged ‘reserve bank of new zealand’
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.
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.