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22 Aug 2019

Real Impact of RBA Cuts

The Reserve Bank of New Zealand (RBNZ) recently cut the official cash rate (OCR) to a historic low of 1% in an effort to stimulate the economy. The domestic economy is slowing down, with the RBNZ doing what it can to inspire people to spend money or invest in more productive investments. As the benchmark for all interest rates charged by banks and other lenders, the OCR is undeniably significant. Despite the historic nature of the current lows, however, homeowners and potential first-home buyers should only expect modest savings.

As soon as the RBNZ announced its decision, some of the nation's biggest lenders got on-board. Almost immediately, ASB announced a 0.5% cut to its variable mortgage rate, along with a much less generous 4 basis points cut to its two-year fixed rate loan. While anyone with a variable mortgage at ASB is likely to save around $70 a fortnight on a $500,000 mortgage, not many Kiwi borrowers currently have a floating rate. For people on a fixed rate loan, the real savings will be about $5 on the same $500,000 mortgage.

While ASB were the fastest to announce rate cuts, most other lenders did eventually get on-board. Westpac reduced its floating rate by 45 basis points, with its fixed rate left unchanged. Kiwibank passed on the full 0.5% rate cut for variable loans, although once again, there was no reduction to the fixed rate. BNZ also reduced its variable rate by the full 0.5%, while also matching ASB with a 4 point cut to its two-year fixed rate. Once again, however, this represents real savings of about $5 on a $500,000 mortgage. ANZ were the last to move, matching most lenders by cutting floating rates by 50 basis points and fixed rates by nothing. 

The RBNZ seem to be running out of moves, and have very little capacity to go lower unless they want to move into negative rate territory. While the NZ dollar has been dropping slowly over recent months, there is still a desire to see a lower dollar to help the struggling economy. If the recent rate cuts fail to stimulate the economy, there could be real issues on the ground for many New Zealand residents. While only the pessimistic few are talking about a recession, there is no doubt that both household and farm debt are higher than they should be.

What happens in New Zealand over coming months will largely depend on global conditions, and make no mistake, the global economy is on shaky ground. While New Zealand enjoys some of the lowest government debt levels in the OECD, economic weakness is intensifying around the world and irregular financial market volatility is becoming more regular each week. Given that variable mortgage rates are still well above fixed rates, and the vast majority of people don't seem interested in them, moves by the RBNZ may not impact the housing market as much as expected.