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30-04-2009

Homeowners advised not to rush to fix rates

NZHERALD

Homeowners are being advised not to hurry to fix their mortgage interest rates by a leading bank economist.

ASB Bank chief economist Nick Tuffley said the message for borrowers following this morning's Reserve Bank decision to cut interest rates by 0.5 per cent remained "that there is no real hurry to fix rates since the door on very low long-term rates slammed firmly shut a month ago".

"The choice of fixing vs. floating will remain a trade-off between the certainty of fixed rates and the low debt-servicing costs in the immediate future of floating rates," he said.

"The Reserve Bank has today given a little more certainty over how long the benefits of floating rate debt will be sustained."

Reserve Bank governor Alan Bollard this morning cut the Official Cash Rate (OCR) to 2.5 per cent taking a full half of one percent (50 basis points) off. Since a cut of this magnitude was expected, most attention has focused on Bollard's commitment to keeping the OCR low for some time.

"We consider it appropriate to provide further policy stimulus to the economy. We expect to keep the OCR at or below the current level through until the latter part of 2010. The OCR could still move modestly lower over the coming quarters," said Bollard.

Westpac Bank moved quickly in response to the cut, reducing its 6 month home loan rates by 0.4 per cent to 5.39 per cent.

The New Zealand dollar plunged nearly US1c immediately after the announcement from US57.34c to US$56.46c before recovering slightly.

"Overall, developments since March point to lower medium-term inflation than previously projected," said Bollard. "The main factors behind this are weaker global growth, and an unwarranted tightening in financial conditions via both higher long-term interest rates and a stronger exchange rate than expected."

Global financial markets had "showed some tentative signs of stabilisation" since March and governments in the major economies were continuing to make progress in resolving their banking system difficulties.

"However, a large amount still needs to be done and sentiment remains fragile. Negative feedback from the global recession could also still adversely affect financial institutions," he said.

"We consider it appropriate to provide further policy stimulus to the economy. We expect to keep the OCR at or below the current level through until the latter part of 2010. The OCR could still move modestly lower over the coming quarters."

Nick Tuffley said the content of the statement "delivered no surprises."

The Reserve Bank had become "more vague on the timing of recovery", he said, and also less confident about the strength of any recovery when it comes.

See the text of Alan Bollard's statement here

What is the Official Cash Rate? - Reserve Bank fact sheet.

See the history of the Official Cash Rate here.

In explicitly promising to hold the OCR at or below current levels until the second half of 2010, the Reserve Bank will contain longer-term interest rate expectations and prevent an unnecessary tightening in monetary conditions before the economic recovery has found its feet."

"In addition, signalling that further rate cuts are possible will mitigate the rush of borrowers looking to fix rates," said Tuffley and prevent a repeat of late March and early April when mortgage holders sought to lock in rates.

UBS economist Robin Clements said it was notable that little attention was given in Bollard's statement to domestic 'green shoots' of recovery.

"Despite improvements in business and consumer confidence (and signs that housing may be reaching a trough), the levels of both remain well below historical averages i.e. as the Reserve Bank notes 'Business sentiment is low, investment has been curtailed and employment reduced'"

"This clear and decisive message is in line with our view that today's cut will be followed by a couple of 25 basis point moves, taking the OCR to a low of 2 per cent."

Clements said he expected this OCR rate of 2 per cent to prevail until the middle of next year and may only move about the current level in the third quarter of 2010.

 

 

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