Posts Tagged ‘reserve bank’
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″.
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.
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