The Reserve Bank has made an OCR cut this week with its Monetary Policy Committee cutting the Official Cash Rate (OCR) by 0.50%.
This OCR cut moves the rate down to 2.5%.
While a cut was widely expected, many people were thinking it was going to be 0.25% with a few hoping that it might be 0.50%. To get the bigger cut is good news for anyone that has borrowed money (businesses and home owners etc) or for those that are considering borrowing money – especially first home buyers.
Most importantly the size of the drop has sent a clear signal about the Bank’s intentions for the economy.
Why this OCR Cut is Important
It’s no secret that there have been ongoing concerns about the economy’s sluggish performance. Most of us had been expecting that 2025 would be the year that we will see the economy recover from a recessionary period that we have endured for the past few years.
All the talk in 2024 was that we just needed to wait for 2025 and the recovery – and we waited and are still waiting!
Until now the Reserve Bank has been concerned about inflation as is the mandate that they work to, but they have been so focused on inflation that they have seemingly ignored the further impacts that this approach has had to the economy. Unfortunately we had seen a huge spike in the inflation and so they appeared laser focused on that, and that alone.
The good news with this OCR cut is it now appears that they have accepted that inflation is under control and can therefore now turn the attention back to the economy.
What is the OCR (Official Cash Rate) in New Zealand?
The Reserve Bank has the Official Cash Rate (OCR) as a tool to achieve and maintain price stability. To keep prices stable, the Government has set us an inflation target between 1% and 3% over the medium term with a focus on the 2% midpoint.
Increasing the OCR increases interest rates and helps bring inflation down.
To help explain this in a simplistic manner we have used the video that Trade Me created. It’s just a 3-minute video and explains what the OCR is in a simple way that ‘sort of’ makes it easier to understand.
Hopefully you found this video explained what the OCR is and how it works.
How Will The OCR Impact Home Owners?
The key is that the OCR cut will flow through to lower home loan interest rates.
If your loans are on floating rates then this will be immediate and hopefully you have already seen the drops, but if you are on a fixed rate then you may need to wait for a while until your loan comes up to being refixed.
For some home owners this might have a great impact.
The aim of the cuts is to give the economy a kick start, and if they are successful then this will see people with a few more dollars in their pockets and an increase in spending. We would expect that this will also kick start the property market and therefore we should see house prices start to increase again. We would suggest that you don’t bet on an immediate increase to the housing market from this weeks decision and they aren’t likely to be massive either, but for those people that have seen the value of their home drop over recent months and years it will be a welcome sight to see the values start to increase.
Increasing house prices give home owners more opportunity to consolidate debts or even sell and still have equity to buy another property. In contrast, increasing house prices might not be welcome sight for first home buyers and might mean they need to start looking at ways to enter the property market sooner and with using low deposit home loans.
Should you refix now or wait? This is a question that a lot of Kiwis have and it’s something that you should discuss with an adviser before making any decisions. There are a few considerations:
- Have you reviewed your lending to ensure that you are with the best bank?
- If you can refix at a lower rate then do you plan to keep the repayments the same and pay the loan off more quickly?
- Do you have the mortgage structured into more than one loan?
- When are your other loans due to come off fixed
Then you might also want to know if we expect the rates to drop further, and if so when?
We expect that the banks may still need to work out what they can offer and especially with the fixed rates. This often happens in the days and weeks after an OCR cut when the wholesale markets have settled again.
There is also talk that there could still be another OCR cut in November, but we would suggest that you do not rely on that and consider reverting to a long-term mortgage strategy now. The risk now is that if the economy picks up faster than expected then we might start to see inflation increasing and maybe the Reserve Bank will look at increasing the OCR.
As always, have a chat to your mortgage adviser and they can discuss how the OCR cut might affect you and can answer your questions too.
