Sludge Report #188 - Down She Goes By 1.5%

Thursday, 29 January 2009, 9:06 am
Article: C.D. Sludge

Home mortgage rates around the 5-6% level or lower should eventually result from the Reserve Bank's dramatic cut in official rates this morning.

A brief one page statement from the Reserve Bank Governor Alan Bollard this morning given to journalists at 8am announced a repeat of December's 1.5% largest ever cut in the official cash rate. Dr Bollard also indicated further cuts may be forthcoming, albeit smaller than the last two.

December's 1.5% rate cut followed October's cut of 1%. The bank has now cut rates 4.75% since July last year when the OCR was at a peak of 8.25%.

Now at 3.5%, the OCR is at the lowest levels it has been at since it was introduced in the 1990s. The previous low point was 4.5% back in 1999.

While today's announcement was not accompanied by detailed economic forecasts the Q&A did tease out a fair amount detail (NOTE: full audio and video will follow on Scoop shortly if you missed the live broadcast of the press conference at 9am).

Mortgage Interest Rate Implications

Dr Bollard's written statement today ended with an element of jawboning to the retail banks whose interest rates have remained relatively high in the face of the dramatic official rate cuts to date.

"To ensure the response we are seeking, we expect financial institutions to play their part in the economic adjustment process by passing on lower wholesale interest rates to their customers. This will help NZ respond flexibly."

The banks still have a considerable way to go to meet the bank's and the public's expectations on this score.

According to Interest.co.nz at 8am this morning the lowest floating rate currently available was 7.2% offered by Southland Building Society, Kiwibank was next lowest at 7.24% and most trading banks were offering floating rates of 7.5% or less. These floating rates are now 4% higher than the official cash rate when historically the margin would be expected to be closer to 2%.

Fixed rates have been falling in recent weeks - partly in anticipation of today's cut - and at the short end rates around 6.5% for 1 year are now relatively common in the market. The BNZ recently led the market down offering a new low rate for six months of 5.95%.

However most fixed rates across the board - and especially at the longer end, 5 years, are around 7% or higher. Anecdotally householders who are renewing their mortgages are tending to take short term renewals in anticipation of longer term rates falling.

And looking at historical trends this would seem wise. Ultimatyely an official cash rate of 3.5% or lower ought eventually to result in mortgage rates closer to 5% than 7%, cutting hundreds of dollars from monthly mortgage payments.

The Reserve Bank's Economic Reasoning

In this statement Dr Bollard concentrated his remarks on the international situation and did not even mention yesterday's dramatic cut in the Dairy payout.

Coincidentally, and reinforcing his remarks, the International Monetary Fund (IMF) released forecasts this morning for global growth of 0.5% for 2009, down from forecasts of over 2% in October last year.

Previously Dr Bollard and the NZ Government have made it clear that they consider New Zealand well positioned to deal with the current global economic crisis. However it is becoming increasingly apparent that there is nowhere to hide from this financial maelstrom.

"The news coming from our trading partners is very negative," Dr Bollard said.

"The Global economy is now in recession and the outlook for international growth has been marked down considerably since our December Monetary Policy Statement."

"Globally there has been considerable policy stimulus put in place and we expect this to help bring about a recovery in growth over time. However there remains huge uncertainty over timing and strength of that recovery.

Dr Bollard said that the impact of Global prospects played a large part in today's rate cut decision.

"We now expect the impact on New Zealand of these developments to be greater than we did in December , as a result of a more negative outlook for the terms of trade and exports and tighter credit conditions."

"We have confidence that inflation will be comfortably inside the target band of 1 to 3 percent over the medium term. Given this backdrop it is appropriate to take the OCR to a more stimulatory position and to deliver this reduction quickly."

Concluding his analysis Dr Bollard remarked on consumer confidence issues - indicating that they will be important to how the NZ economy weathers the hard conditions ahead.

"Lower interest rates will have a positive impact on growth, alongside a lower exchange rate and fiscal stimulus, provided firms and households do not unnecessarily contract their spending."

It is worth noting that most recent business confidence surveys have indicated sharply contracting business spending and investment. Meanwhile consumer confidence cannot but be taking a pounding with an endless stream of very negative news both internationally and domestically.

© Scoop Media

Alastair Thompson

Scoop Publisher

Alastair Thompson is the co-founder of Scoop. He is of Scottish and Irish extraction and from Wellington, New Zealand. Alastair has 24 years experience in the media, at the Dominion, National Business Review, North & South magazine, Straight Furrow newspaper and online since 1997. He is the winner of several journalism awards for business and investigative work.

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