OCR 22-09-2012

Reserve Bank Governor Graeme Wheeler today left the Official Cash Rate unchanged at 2.00 percent.
This was expected by the market with the majority forecasting a reduction in the November announcement when the Governor has access to more information to assist with making an informed decision.

He cited his main reasons for holding the rate today as:

  • The prospects for global growth and commodity prices remain uncertain.
  • Political uncertainty remains.
  • Upward pressure on the New Zealand dollar exchange rate. A decline in the exchange rate is needed.
  • House price inflation remains excessive, posing concerns for financial stability. There are indications that recent macro-prudential measures and tighter credit conditions in recent weeks are having a moderating influence.

On the near future:

  • Annual CPI inflation is expected to weaken in the September quarter.
  • Monetary policy will continue to be accommodative. Our current projections and assumptions indicate that further policy easing will be required to ensure that future inflation settles near the middle of the target range.

New LVR Restrictions

These new rules have started to reveal a host of unintended consequences. The one causing the most pain is the simple $10-25k top up being declined if your property is rented. This immediately restricts further borrowing against that property to 60% of the value.

The Reserve Bank published some useful guidelines on how the new restrictions work in practice and where the exemptions lie. We have reproduced them in full on our website here.

Interest Rates

The swap rates all ticked up this past two weeks in anticipation of both the NZ OCR announcement and the biggie - tomorrow's US Fed announcement - which has all the markets spooked.

There is a noticeable "bottoming out" of the rates a couple of weeks back which we last saw around April/May 2015. Tomorrow's US Fed announcement could be very telling on whether we have seen the bottom for mortgage rates. We will continue to monitor closely.

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 are starting to see some cutting back from the banks on both cash contributions and discounting. Both are still to be had but the signals are that there is less on offer.

Our 2c worth

There is some really interesting reading between the lines taking place at present. The RBNZ needs to keep dropping the OCR because the currency is too high.

BUT, they don't want the bank's to pass on the rate reductions because the housing market is overheated (and they seemed to get their wish with the last rate decrease and the tightening of discounting and cash contributions).

The markets (stock markets globally) panicked this past two weeks because they believe the US Fed is going to stop all help and start raising rates (their inflation is 2.3% now which is above the 2.0% target, but they also have a global mandate...) so money supply tightened and swap rates did a big U-turn.

What does this mean? Don't try to pick the bottom for rates. Work your strategy and then focus on overpaying your debt whilst the rates are at record lows. You may never get another opportunity like this in your lifetime.

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