The average interest rate banks received on their stock of loans was still 6% for mortgages and 6.38% for business loans in March, according to the latest available Reserve Bank data.
These rates weren’t too far off their peaks of 6.39% for mortgage rates in October 2024, and 7.91% for business loan rates in April 2024.
Indeed, the average rates paid on the stock of debt were still way above the high 2% mark the average mortgage rate sank to in 2021, and the low 3% level the average business rate reached.
It is no secret it takes time for OCR cuts to flow through the economy, as borrowers lock in rates for fixed periods of time.
However, Silk made the point that borrowers’ preferences to put their mortgages on relatively expensive floating or shorter-term rates late last year and early this year meant many weren’t yet experiencing the relief of lower interest rates.
Borrowers had been willing to pay a premium to buy some time, in anticipation of interest rates falling, before locking in lower rates for longer periods of time.
But with the end of the Reserve Bank’s easing cycle in sight, borrowers have in recent months been locking in interest rates for longer durations.
Silk expected this to continue, with the average rate paid on the stock of mortgage debt expected to fall to 5% by March next year.
She believed the extra cash that would be freed up by borrowers changing their preferences, against a backdrop of lower interest rates, would start to flow through the economy.
Silk didn’t accept the criticism that the Monetary Policy Committee’s decision to tread cautiously would have a chilling effect on households’ and businesses’ spending and investment decisions at a time when the economy needs a boost.
She was comfortable with the market response to Wednesday’s statement and press conference, warning observers not to overstate the development of the committee’s view from the time it last released a fulsome statement in February.
“I think our commentary was actually quite balanced, rather than hawkish,” Silk said.
However she accepted people might interpret it as more hawkish relative to the “much stronger easing signal” the committee sent in February.
Silk didn’t accept the criticism the committee created uncertainty by pencilling in an additional OCR cut in its May statement, compared to its February one, all the while the governor said it had “no clear bias” for its next meeting in July.
She downplayed the difference in the OCR track between the two statements, saying it was small in the bigger scheme of things and in the context of how different various economic scenarios could play out.
Silk reminded those looking to the Reserve Bank to stimulate growth that its job is to keep the annual inflation rate between 1% and 3%.
However, she recognised that “price stability is one of the conditions you need for growth”.
Her comment came after the Government unveiled a raft of spending cuts in Budget 2025, partially to fund tax support for businesses (in the form of accelerated depreciation) to encourage them to invest in new assets to spur productivity growth.
In the March quarter, the inflation rate hit 2.5%. The Reserve Bank expects it to rise to 2.7% in the September quarter, before settling at the 2% midpoint of the bank’s target range in 2026.
Jenée Tibshraeny is the Herald‘s Wellington business editor, based in the Parliamentary Press Gallery. She specialises in government and Reserve Bank policymaking, economics and banking.
