OCR held at 3.50%
Thursday 29 January 2015
The Reserve Bank today left the Official Cash Rate unchanged at 3.5 percent.
Reserve Bank Governor Graeme Wheeler cited his main reasons as:
- “World oil prices have fallen 60 percent since June last year. The oil price decline, together with uncertainties around the transition of US monetary policy, has led to an increase in financial market volatility.
- The lower oil price will have a significant impact on prices and activity in New Zealand. The most direct and immediate effects are through fuel prices, with the price of regular petrol falling from a national average of $2.23 in mid-2014 to $1.73 currently. This will increase households’ purchasing power and lower the cost of doing business.
- Annual economic growth in New Zealand is above 3 percent. However, fiscal consolidation, the reduced dairy payout, the risk of drought, and the high exchange rate will weigh on growth.
- The high exchange rate, low global inflation, and falling oil prices are causing traded goods inflation to be very weak. Headline annual inflation is expected to be below the target band through 2015, and could become negative for a period before moving back towards 2 percent, albeit more gradually than previously anticipated.”
New language that the market had been anticipating is:
- “In the current circumstances, we expect to keep the OCR on hold for some time. Future interest rate adjustments, either up or down, will depend on the emerging flow of economic data.”
The market had expecting most of the last sentence but the “or down” addition has come as a surprise as is evident in the commentary below from the main bank’s economists earlier this week. This is the first time the Governor has spoken openly about a potential rate cut.
From the NZ Herald 27/01/2015:
"The Reserve Bank won't need to lift the OCR over the next couple of years," said ASB chief economist Nick Tuffley. "We are no longer explicitly forecasting future OCR increases."
ANZ economist Mark Smith said: "We now expect no further hikes for the foreseeable future."
Westpac chief economist Dominick Stephens has pencilled in a rate rise for June next year but added: "The prospect of OCR hikes is now so distant that debating the exact timing is a red herring."
From the ANZ Market Focus 26/01/2015:
We expect the RBNZ to deliver a genuinely neutral policy assessment, dropping December’s implicit tightening bias. The RBNZ has an inflation target and not a growth, or housing one. The outlook for core inflation measures have eased despite still solid growth. Throw in global wobbles and currency fickleness – uncertainty is high. We expect a reasonably curt policy assessment, which will highlight data dependency from here.
We have an interesting situation now where the floating rate is higher than all the fixed rates. If you are floating and not using a revolving credit facility, chat to us about whether a 6 month “back door float” may be suitable for part of your loan.
There has been an interesting convergence of swap rates in the past week resulting in major reductions in the 3-5 year rates.
Due to massive reduction in the long term swap rates, we see further reductions likely in the 3-4 year term and possible discounting of the 5 year rates (which are near records lows).
There are three curves on the graph below:
1. Our baseline - 08/08/2013
2. One year ago today
Thinking of Renovating?
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Next OCR update, we will be talking rental yields around the country and fixing you up with some cool calculators to help you work out what you should be charging your tenants.
Everyone's circumstances are different. This statement does not constitute advice and is a general commentary on the current market. If you would like to discuss your specific situation, please call us to discuss. If you would like to lock in some rates, we can assist you as required. Due to privacy, we will need an email from you authorising us to access current information on your loans.