OCR 10/03/16

 OCR reduced to 2.25%

With ever stronger hints at a future reduction

Reserve Bank Governor Graeme Wheeler today reduced the Official Cash Rate to an historic low of 2.25 percent.
 
He cited his main reasons as:

  • The outlook for global growth has deteriorated.
  • Financial market volatility has increased.
  • Commodity prices remain low.
  • Domestically, the dairy sector faces difficult challenges
  • House price inflation in Auckland has moderated in recent months, but house prices remain at high levels and additional housing supply is needed. Housing market pressures have been building in some other regions.
  • There are many risks to the outlook. The main domestic risks relate to weakness in the dairy sector, the decline in inflation expectations, the possibility of continued high net immigration, and pressures in the housing market.

In a strong signal that, as the market has forecast, the OCR will decrease further, he finished with:

Headline inflation is expected to move higher over 2016, but take longer to reach the target range. Monetary policy will continue to be accommodative. Further policy easing may be required to ensure that future average inflation settles near the middle of the target range. 

Interest Rates

Approximately 25% - 35% of NZ bank lending is borrowed from offshore, meaning it is impacted by global conditions. As you can see, the 5 and 7 year rates have increased in the last couple of weeks which in turn has pushed up the 4 and 5 year rates with the banks.

Here are the current Swap Rates

and here is the yield curve. The blue line is as at today; the red line is this time last year, and the yellow is from 2013.

We expect a steepening of the curve following this morning's OCR drop. The floating and short term rates should ease a little and the longer term rates hold steady or increase if international funding increases.

The floating rate is the least attractive - talk to us if you would like to discuss a "back door short term float" to reduce your interest and increase your principal decimation

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