Will Australia follow New Zealand’s lead? We have noticed official cash rates are dropping over the ditch… our turn next?
New Zealand’s largest bank expects the Reserve Bank will deliver another two interest rate cuts before the end of the year.
But borrowers should be wary of expecting to see the full benefit on their mortgages, with warnings that banks may keep some of the drop to themselves.
On Thursday the Reserve Bank surprised financial markets by lowering the official cash rate (OCR) to 2.25 per cent, and signalling that it would probably drop it to 2 per cent in the coming months.
While any cut to bank interest rates is unlikely to be immediate, the announcement is good news for mortgage holders, but bad news for savers, with the banks likely to move borrowing rates in the coming weeks.
Thursday marked a record low for the OCR, but one of New Zealand’s most influential economists, ANZ chief economist Cameron Bagrie, predicted the Reserve Bank may be forced to go even lower than it signalled this week.
Bagrie is now forecasting another two cuts in the OCR before the end of the year, bringing it down to 1.75 per cent.
He said the Reserve Bank had not factored much of the impact of increased bank funding costs in its base scenario, meaning governor Graeme Wheeler may have to cut further.
“I’m a bit more bearish [downbeat] on the global [economic] scene” than the Reserve Bank, Bagrie said.
Whether mortgage rates fell as a result of the latest drop was a “million dollar question”. Bagrie has been warning for weeks that banks’ funding costs were increasing, and now they may look to keep some of the lower OCR to protect margins.
“The wholesale interest rates have dropped down so there is scope for [mortgage] rates to drop.
“But I think we’re moving into an environment, given the pressure on funding costs, where the pass through” of OCR movements into mortgage rates “is not going to be one for one”.
On Thursday morning Co-operative Bank dropped its floating mortgage rate by 25 basis points but left its other rates unchanged.
Westpac chief economist Dominick Stephens predicted some fixed rate mortgages would drop in response to a fall in wholesale interest rates.
“Wholesale rates have dropped a good 17 basis points at the two year swap rate, so I would expect that would dominate in the week ahead” with two-year fixed rate mortgages dropping.
“Those who held off fixing [their mortgages] on our advice will be very pleased,” Stephens said.
Stephens agreed it was quite possible the OCR could drop below 2 per cent. Westpac has been predicting since June 2015 that the Reserve Bank would lower the OCR to 2 per cent.
“That call has been based on the US Federal Reserve lifting interest rates, I think the risk is that if the US Federal Reserve backs off the idea of interest rates hikes, then New Zealand will have to follow suit with a lower OCR, and I think that’s the main scenario actually, in which the OCR drops below 2 per cent.”
Article originally posted at stuff.com.au