With a rate cut certain but its size up for debate, the bank faces a delicate balancing act between stimulating growth and avoiding overreach, writes Catherine McGregor in today’s extract from The Bulletin.
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Economists divided on the size of today’s OCR cut
The Reserve Bank will announce its Official Cash Rate decision this afternoon, and while a cut is assured, the size of it remains in doubt. Interest.co.nz reports that the NZIER’s “shadow board” – a group of academics, economists and business people – mostly favours a 25 basis point cut, citing spare capacity in the economy that allows for “a small cut to support a recovery in activity without affecting the inflation outlook.”
Yet several members believe the weaker-than-expected June GDP figures justify a 50-point move to provide the stimulus required for an economic recovery. That split is mirrored among bank economists: ANZ and BNZ prefer 25 points, reports Newsroom, while Westpac, Kiwibank and ASB back a “jumbo” 50. Interest.co.nz’s David Hargreaves is in the former camp, arguing for a cautious 25-point cut now, with future inflation and labour market data guiding the next move in November. Either way, the economic community is looking forward to an action-packed day. “Pass the popcorn,” Hargreaves writes. “The RBNZ might not have Orr anymore, but it can still shock.”
Banks move early as mortgage rates tumble
With a smaller cut all but baked in, the banks have already begun trimming their mortgage rates. BNZ’s rates give a good idea of where rates are sitting: yesterday it lowered its six-month term to 4.89%, 18-month to 4.49%, and two- and three-year terms to 4.65% and 4.85% respectively, while its one-year special sits at 4.49% – which matches the current rate from ASB, ANZ, Kiwibank, and Westpac. Mortgage broker Nathan Miglani tells the Herald’s Cameron Smith (paywalled) that the latest rate drops – by as much as 25 basis points – suggest growing expectations of a larger OCR cut. He believes a one-year mortgage rate of 3.99% “is definitely on the cards” within six months. Canstar’s Bruce Pitchers is less optimistic, but agrees that if the RBNZ signals further easing, short-term rates could fall another 10–25 basis points by summer.
Will banks pass on the full cut?
Borrowers hoping for instant relief today may be disappointed. As Herald columnist Liam Dann (paywalled) explained after the last OCR cut, banks rarely pass on the full reduction. The “pass-through” on floating rates typically ranges between 15 and 20 basis points, not the full 25, due to two main factors: much of the cut is often priced in beforehand, and the cost of international borrowing limits how much banks can shave off their lending rates. Over time, the Reserve Bank estimates that about 80% of a 1% OCR change eventually flows through to two-year mortgage rates, but the full effect can take six months.
What does it all mean for house prices?
While many economists warn that deep cuts risk reawakening the housing market’s old excesses, others see less need for restraint. Kiwibank’s Jarrod Kerr and Sabrina Delgado are in the latter camp. In an update aimed at property investors, they say interest rates are the biggest driver of house prices. Though “cuts are feeding through fast … they have not gone far enough,” they write. “Much of our optimistic forecasts for growth [are] predicated on a bounce in housing demand. It’s the Kiwi way.”
Ain’t that the truth. But the pair’s faith in the transformative power of a hot property market isn’t universal. In The Spinoff, Hayden Donnell points out that economists increasingly doubt the so-called “wealth effect” of higher prices, noting that a rising property market doesn’t necessarily translate into more spending by homeowners, while making things much tougher for renters and first-home buyers alike.
“We’ve had a homelessness crisis, an emergency housing crisis, years of stories about desperate first-home buyers, and all the while, economic commentators harping on about how we need to wean ourselves off our addiction to selling unproductive assets to each other to keep the economy running,” an exasperated Donnell writes. “Now there are finally some signs we’re breaking the habit, and some of those same commentators say we just need one more hit to get us through the comedown.”
Hayden Donnell: Newly sober nation begs for one more hit of high house prices
