The U Turn

After more than 4 years, the Reserve Bank cut the Official Cash Rate by 0.25 points from 5.50% to 5.25%, and they haven’t ruled out a further two more cuts this year.

This is significant news. Just a few months ago, in May of this year, there was talk of further OCR increases and only possible rate cuts toward Q4 2025. It is likely that the RBNZ will make reductions of 0.25 points, which will bring the OCR rate to 4.75% going into the new year. Wholesale markets had anticipated the rate cut leading up to the announcement this week, and some were better prepared than others. Anyone following the swaps rates would have seen the early price movement.

What does this mean for borrowers?

Banks quickly responded, with some trimming rates within hours of the announcements and passing this along to you and I.  Banks tend to reprice their rates close to or just after announcements and certainly, if there is a change to the OCR. We can expect this to be the emerging trend in the next few months. Keep an eye on wholesale interest rates, as they are considered a more forward-looking indication of what the market thinks interest rates will be in the future. Banks use the swap rates to help set the rates for borrowers. However, a decrease in the OCR rate doesn’t always mean an equal decrease in borrowing rates. Instead, in time there should be a shift in the interest rates, with longer-term rates (3, 4, and 5 years) becoming progressively more expensive. Usually, this is an indication that the economy has bounced back and what we would typically see home loan rates to look like.

What does this mean for house prices?

Interest rates have already started to come down. Over the next 12 months, circa 70% of fixed-rate loans will be refixed. However, the rates are still historically high, and any household savings will likely first be used to repay short-term debt and build up savings before being put back into the economy. I anticipate property prices will moderately increase over the next few months. We could expect to see sales increase and the number of days to sell decrease. Confidence will return to the market, but it will take time. Unemployment is high, and those numbers will likely increase this year.  Immigration and tourism numbers are still below pre covid levels, and many businesses are doing it tough.  This is why the RBNZ has taken action earlier than anticipated.

Blue Water Mortgages, New Plymouth, Taranaki.