The Reserve Bank's impact on retail rates is 'increasingly irrelevant' , says Cameron Bagrie of ANZ National. Photo / Mark Mitchell
nzherald.co.nz will have live coverage of the interest rate announcement from 9am.
The Reserve Bank is today expected to cut its benchmark official rate, with expectations that it could come down by between half and a full percentage point.
The cut is large compared to the bank's pre-credit crunch standards. However, mortgage rates offered by banks are not expected to change significantly.
The Reserve Bank is "increasingly irrelevant" when it comes to influencing retail interest rates, said Cameron Bagrie, the chief economist at NZ's largest bank, ANZ National.
The only rates that will move will be the floating rate, now ranging from 5.99 to 6.99 per cent depending on the bank, and very-short-term rates - six months to one year. These rates should move by "something approaching the amount of the cut," said Mr Bagrie.
Changes to the official cash rate have a direct effect on the short-term money markets that drive floating and short-term fixed-mortgage rates.
But fixed rates will be determined, among other things, not by what the Reserve Bank does with the cash rate today, but what it indicates it may do over the next 12 to 24 months.
"In order to get those rates down lower, you really have to see the market reassess not just how low the OCR is going to go, but how long it is going to stay low," Mr Bagrie said.
Analysts predict the RBNZ may start raising interest rates in early 2010 in response to early signs of economic recovery.
This is the reason "swap" rates, the theoretical wholesale market rates that underpin what banks pay for their funding, have been ticking up in recent days, which in turn has seen some long-term mortgage rates rise.
However, due to the credit crunch, banks are still having to pay big margins "over swap" to secure funding on overseas and domestic wholesale money markets.
"To fully appreciate what's going on, have a look at what deposit rates you can now get - they are now above wholesale rates," Mr Bagrie said.
Two-year term deposit rates are now clustered around 5.25 per cent.
"What [Reserve Bank Governor] Alan Bollard controls is becoming increasingly irrelevant. The higher deposit rates go, the less capacity [there is] for borrowing rates to fall."
