Mike Hosking quizzes Adrian Orr as to why he moved to cut the official cash rate. Video / Newstalk ZB
Major banks moved to slash interest rates yesterday immediately after the Reserve Bank cut the official cash rate in a move welcomed by homeowners battling high mortgage repayments and a cost of living crisis.
Pundits are now picking further cuts to home loan rates in coming months which will bring relief for struggling Kiwis and likely breathe new life into the property market ahead of the traditional spring surge.
Minutes after the Reserve Bank cut the OCR to 5.25% – the first cut since March 2020 – homeowners were able to secure a new 6.59% one-year fixed rate deal from ASB, down from 6.85%.
ASB also announced it had dropped its other fixed and variable rates, while ANZ, Westpac and Kiwibank also cut variable rates.
Mortgage brokers and economists praised the Reserve Bank’s decision as the “right move”, saying it was unlikely to drive up house prices but would give homeowners more room to breathe on home loan repayments.
But many also criticised the Reserve Bank for its “complete and utter 180″ u-turn.
In May, the central bank forecast there was a 60% chance of an OCR rise being needed today, saying it might not start cutting the rate until the second half of next year.
For the Reserve Bank to then ignore its forecast just three months later made it hard to trust its judgment, Infometrics chief economist Brad Olsen said.
“They should be saying they were completely and utterly wrong,” he said.
“Their forecasts are pretty clear cut that they didn’t have any idea what the economy was doing.”
Brad Olsen, chief executive and principal economist at Infometrics, says Reserve Bank's about-face on earlier forecasts makes it hard to trust its economic judgement. Photo / Mark Mitchell
The Reserve Bank responded in its press conference by suggesting forecasts are not set in stone and that it has to act on the latest data.
It made the cut because annual inflation was heading back to the target range of 1-3%, and appeared to be coming under control in economies around the world, it said.
Holding the OCR higher could therefore act as a handbrake on New Zealand’s strained economy, it said.
“It’s the darkest right now....it’s darkest before dawn and it’s dawn now according to our projections,” Reserve Bank Governor Adrian Orr said.
Homeowners, businesses and politicians hope yesterday’s decision marks a turning point in the nation’s economic fortunes.
From March 2020 until September 2021, the Reserve Bank kept the OCR at a record low 0.25% as it and the Government tried to stimulate the economy amid fears the Covid pandemic would bring about recession.
The economy would hold up but house prices and then inflation began to run out of control as Kiwis struggled with rising costs.
Attempting to tame the runaway costs, the Reserve Bank almost continually raised the OCR between October 2021 and May 2023 until it reached 5.5%.
It then held the rate steady for over a year until yesterday’s cut to 5.25%.
Finance Minister Nicola Willis said the cut was “welcome relief for families and businesses”.
“New Zealand has been suffering an acute cost-of-living crisis since the middle of 2021, with weekly food budgets stretched thin, mortgage repayments high and confidence in our living rooms, offices and boardrooms low.
“I am pleased the Reserve Bank’s decision to lower the OCR today shows it has confidence that inflation is under control and the era of extreme price increases is over.”
Act leader David Seymour said the cut showed New Zealand had “turned the corner on the three-year-old cost of living crisis”.
Property pundits and economists expect the cuts to give confidence to a housing market where prices have been falling but not bring about overnight changes.
Olsen said while the OCR cut would help, many homeowners were still locked into fixed interest rate deals, so couldn’t take advantage of lower rates.
Banks had also been starting to lower rates before the OCR cut, he said.
ASB’s executive general manager Jax Mitchell said the bank had now made a series of interest rate cuts.
“This is the 12th time since November we’ve lowered our fixed mortgage rates,” she said.
Reserve Bank Monetary Policy Commitee, Adrian Orr (left) top row l-r: Paul Conway, Bob Buckle, Karen Silk. Bottom row l-r: Carl Hansen, Prasanna Gai, Christian Hawkesby. Composite Photo / NZME
Nick Goodall, head of research at property analysts CoreLogic, said there was currently an oversupply of housing on the market compared to buyers and this had been keeping house prices down.
However, the OCR cut could give the housing market more confidence heading into its traditionally busy spring buying season, he said.
Ray White Group chief economist Nerida Conisbee said house prices had fallen 1.9% over the three months to June, with Auckland and Wellington recording the largest declines of 2.7%.
But she believed buyers might now fear the OCR cut could drive prices up and so move quickly to buy before that happened.
Bruce Patten, mortgage broker and director at Loan Market, said the cut was fantastic news.
Patten believed homeowners could now be getting rates as low as 5-5.5% within six to eight months, while Olsen said he expected the Reserve Bank to cut the OCR at “just about every meeting going through into next year”.
Patten said he believed the Reserve Bank had given in to “mounting pressure” because it “finally realised how tough it’s getting out there”.
BNZ economists agreed, saying the easing was overdue.
“The New Zealand economy is buckling under the pressure of extremely tight monetary conditions, slumping net migration, Government cutbacks, rising unemployment, reduced investment activity and weak confidence,” BNZ said.
The rate cuts would also bring relief to farmers and especially business owners, who typically fixed on shorter terms, economists said.
Retail NZ said its members had been hurting over the last 12 months.
The most recent Retail NZ Retail Radar Survey found that 71% of members advised that they did not meet sales targets in the last quarter and 42% were not confident they would still be in business in 12 months’ time.
”We are hopeful that this announcement today will turn around consumer confidence, which has been at prolonged low levels over the last couple of years,” the group’s chief executive Carolyn Young said.
“It’s welcome news for the wider economy and hopefully we will see an uptick before Christmas.”
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