Have interest rates reached the bottom?
Contrary to market expectations, the Reserve Bank this week opted to leave its official cash rate unchanged at 1 per cent.
It turned out to be a bad day at the office for those in the financial markets when the "no change" call was revealed: the New Zealand dollar spiked higher, as did wholesale interest rates.
• OCR: NZ dollar spikes after RBNZ leaves interest rates unchanged at 1 per cent
• NZ dollar falls as waning inflation expectations boost odds of OCR cut
• Weak inflation outlook could be enough to convince the Reserve Bank to cut the OCR
• Reserve Bank of NZ keeps OCR at 1%, scope for more stimulus
The Kiwi soon retreated but the two-year swap rate — a key measure for determining mortgage rates — remained elevated at 1.14 per cent.
The official cash rate (OCR) remains at its lowest point since its inception in 1999.
The current cycle of falling rates began in June 2015, when the OCR was cut by a quarter of a percentage point to 3.25 per cent.
Analysts now say the interest rate cycle may well be at — or close to — the bottom.
For borrowers, that means today's rates could soon be viewed fondly as the good old days.
More than a few economists agreed with deputy Reserve Bank governor Geoff Bascand's view that the economy is "somewhere near" a turning point.
Jason Wong, senior markets strategist at the Bank of New Zealand, said there was a sense that global growth was near a transition point and some of the risks that overhung the global economy a few months ago appeared to have dissipated.
Late in the week, the two-year swap rate was still 10 basis points higher than where it was before Wednesday's rate call.
However the Kiwi, which shot up, had settled nearer to its pre-review levels.
Wong said it was possible that the Reserve Bank's 1 per cent OCR could hold from here on.
"Our view is that the 1 per cent could hold for the foreseeable future — one to two years," he said.
"However the risk is on the downside against the backdrop of global uncertainty."
A satisfactory trade deal between China and the United States, and a pickup in global growth, would reinforce the more optimistic scenario, said Wong.
He said Bascand's comment was not wide of the mark.
"It's a fair assessment and it's allied with our view that we are close to a turning point, but hey, if the world looks pretty bad, they could cut again," he said.
"So the risk is to the downside."
Wong said the factor that was often overlooked about the New Zealand economy was the continued strength in the markets for most of this country's key commodities.
"I would not underestimate how powerful that is — typically that is quite positive for the New Zealand dollar," he said.
The reason the Kiwi had not rallied on the back of stronger commodities prices was its now close connection to the Chinese yuan, which has been under pressure because of China's slowing growth and worsening trade relations with the US.
ASB chief economist Nick Tuffley said he now expects the central bank to move with quarter-point reductions in February and May, but he too said it was possible that rates may have already hit bottom.
"It's possible that it could have bottomed for the OCR and it's quite possible that for term rates, particularly long term rates, that we may have seen the absolute lows already," Tuffley said.
He said it appeared the financial markets had moved on "somewhat" from the doom and gloom stage.
He too broadly agreed with the Reserve Bank's Bascand.
"We think that the low point for growth will have been the second half of this year, but what we do see is a more gradual pickup coming through next year, particularly in the first half."
However, the wild card for the interest rate outlook will be the Reserve Bank's announcement on bank capital ratios, which is due on December 5.
The central bank wants the commercial banks to strengthen their balance sheets to make them more capable of sustaining shocks, but the question is how much money they would have to raise, and over what time.
Depending on the outcome, the changes could have big implications for the cost of credit, Tuffley said.
ANZ markets strategist Sandeep Parekh said the market had been left "licking its wounds" after Wednesday's surprise announcement.
"People are treading very carefully but there is a lot of cautious optimism out there in the markets," he said.
ANZ expects two more rate cuts next year, yet the outlook appeared to have improved.
"Yes, it is nice to see a bit of optimism in the markets and a bit more light at the end of the tunnel, but there is still a little way to go yet," he said.
Westpac senior market economist Michael Gordon is picking a 0.75 per cent OCR next year — where it may stay for a few years to come, depending on how global sentiment develops.
Gordon said interest rates were getting close to their low point.
"It's not our central view but it is possible that we are getting very close to the end."
Gordon said Westpac was on a "similar page" to the Reserve Bank's view that the economy was close to a turning point.
"There is strong evidence that the next [September quarter] GDP numbers will be particularly weak, but we are also getting more confidence that that might mark the low point for growth," he said.
Westpac expects annual GDP growth to pick up next year, but to remain under 3 per cent.