Official cash rate dropped to record low

The Reserve Bank has cut the official cash to the lowest rate ever, dropping it 1.5% after being static on 1.75% for two and a half years. Banks quickly indicated drops in mortgage interest rates.

The dropped had been signalled by the Reserve Bank in March, so wasn’t a surprise, but there have been effects on markets.

RNZ Analysis: What the OCR cut means for you

Even for the informed and interested, the past two-and-a-half years have been exercises in “deja vu all over again” as the RBNZ held its official cash rate steady at 1.75 percent, repeating a mantra of the risks being balanced, with the next move likely to be a rise, probably in a year or two … or three.

But that changed in March when the RBNZ governor Adrian Orr said the risks were now tilted to the downside and the next move was more likely to be a cut.

That made the latest monetary policy statement a live event worth following.

Mr Orr and the RBNZ’s newly established monetary policy committee have delivered a rate cut, that may be followed by another later in the year.

But was a rate cut needed, and more importantly will it work?

Opinion has been divided, with backers of a rate cut saying a slowing economy, cooling housing market, stubbornly low inflation, lower immigration, and a gloomier international outlook justified lower rates to stimulate the economy.

Our economy is relatively healthy so why the change down?

New Zealand is doing better than many economies, with growth around 2.5 percent, consumers are still spending and businesses investing, although perhaps not as freely as before, unemployment is close to a 10-year low, and domestic inflation pressures have been bubbling quietly beneath the surface.

One commentator said before the decision that a rate cut would be like sending out the whole fire brigade to rescue one kitten up a tree.

Immediate effects:

The retail banks have been quick to pass on some of the latest cut with floating and fixed mortgages lowered by a little over a tenth of a percent, while deposit rates have also been reduced, which will hurt those relying on their savings with in the bank.

The New Zealand dollar initially fell three quarters of a cent against the US dollar, before reclaiming much of the lost ground and settling about a quarter of a cent lower.

People with mortgages will be happy that their interest rates remain low or will nudge down a bit more.

Banks have already been criticised for not dropping mortgage rates by the whole .25%, but they may adjust them further as they work out how things look and what their business competitors do.

Cash rate stays, foreign buyers go

Yesterday the Governor or the Reserve Bank, Graeme Wheeler, announced there would be no change to the record low cash rate of 2.25% and also warned that property investors could soon be targeted with new Loan to Value ration rules.

Wheeler said that rising house prices as a risk to the country’s financial stability.

Later in the day, possibly in part at least in response, the Westpac and ANZ banks said they would no longer lend to overseas buyers of New Zealand properties due to financial risks.

This follows similar moves recently in Australia. Other banks are expected to do likewise.

This is expected and hoped to have some impact on escalating property prices.

NZ Herald: Westpac, ANZ Bank shut out foreign buyers

Westpac New Zealand has announced that from today it will no longer lend to non-resident borrowers with overseas income.

Borrowers on temporary resident visas will only be accepted if they have both a New Zealand address and a New Zealand-based income.

ANZ has also announced restrictions that will effectively shut out most non-resident, overseas-based borrowers, including restricting lending to owner-occupied properties.

The restrictions will not affect New Zealand passport holders living abroad and purchasing property funded by overseas income.

A Westpac spokeswoman said the restrictions “reduces risk”.

“Verification of foreign applications is essential to meeting our lending criteria and obligations, but is operationally difficult in these cases.”

An ANZ spokesman said the changes were made to ensure the bank was “appropriately positioned in the current housing environment, taking into account supply pressure in certain areas”.

Auckland mortgage broker Bruce Patten, of mortgage brokerage Loan Market, said he expected more banks to follow Westpac and ANZ.

The majority of non-resident, overseas-based buyers would take out New Zealand bank loans for purchases here, unless they paid cash, Mr Patten said.

“Most banks around the world won’t take security in a country other than their own…it is going to cut any overseas purchases out.”

Mr Patten believed the change was partly driven by the Australian-owned banks wanting to follow developments across the Tasman – but there could also have been pressure from Government or the Reserve Bank.

“If this has an impact on slowing the house price rise down, then perhaps they might decide that they don’t need to bring [other] measures in.”

Time will tell how much effect this will have on the property market and house prices.