‘Home loan relief is coming’ after official cash rate cut

Home loan borrowers can expect rates to fall for the rest of this year and next, commentators say.

The Reserve Bank cut the official cash rate by 25 basis points to 5.25% on Wednesday.

While it was a move that was forecast by several economists, it was a reversal from the bank’s position in May.

Infometrics CEO Brad Olsen described it as a “WTH (what the hell) moment” and “the biggest flip-flop ever.”

Mortgage rates moved within minutes — Kiwibank cut its variable rates by 25 basis points, passing on the full cut, and ASB cut its fixed and variable rates. Its 18-month term fell 34 basis points.

BNZ chief economist Mike Jones said there would be continued pressure on wholesale and retail interest rates.

“Probably the most important implication of the announcement, next to OCR itself, was the green light on ongoing and potentially aggressive cuts this year and next.

“I think they’ve paved the way pretty well for interest rates to continue to come down. Now that’s considered what’s necessary given the changes to the economy and the inflationary outlook that’s been pretty much dialed in today.”

Olsen said the cut may have merely cemented in the minds of banks and the market that rate moves over the past two weeks were appropriate. Several banks have cut their shorter fixed-term rates.

“Everybody has gone ahead, market prices, banks following wholesale rates. This is holding it back.”

But he said Infometrics generally expected cuts at every meeting for the rest of this year and into next.

Opes Partners economist Ed McKnight said home loan rates will “almost certainly” continue to fall.

He said that while the OCR cuts have already been priced into wholesale rates and some of that has trickled down to borrowers, the Reserve Bank is signaling a substantially lower path for rates.

They now forecast OCR to be below 4% by the end of next year.

“I expect the wholesale market to react quickly. But expect to see your mortgage rate go down faster than OCR. It’s the same as when OCR went up. Mortgage rates went up faster than OCR.”

Property Investors Federation of NZ spokesman Matt Ball said the move was a sign of “better times ahead”.

“Today’s small reduction will take time to work through the system as many property investors are on fixed rate mortgages. However, it is a sign that inflation has been beaten and will encourage investors struggling with high costs to stay in the business.

“Better yet, it will encourage investors who have put off buying new properties back into the market, increasing the number of properties available for rent.

“The main driver of rents is supply and demand, so having more rents on the market should reduce the pressure on rent increases.

“We hope there will be more interest rate cuts in the future. Landlords have had an incredibly tough time in recent years as taxes, interest, rates, insurance and maintenance costs have risen rapidly.”

CoreLogic chief economist Kelvin Davidson said the cut probably won’t mean much for the housing market. The Reserve Bank still expects to see house prices remain flat for another year before picking up again.

“In reality, not much has probably changed as a result of today’s decision and revised economic forecasts. Most people had already anticipated an easing of monetary policy at some point soon, and this has just been confirmed. Indeed, banks have already reduced mortgage rates for some fixed terms and this process looks set to continue – which will be a huge relief for many households.”

But he said households also had to worry about rising unemployment now – the Reserve Bank is predicting a higher peak of 5.4%. That would hold back home sales and prices, he said.

“Debt-to-income ceilings will have a similar effect as mortgage rates fall over the medium term.

“Overall, the next phase of monetary policy easing is here, and mortgage rates will fall over the medium term. But the RBNZ was keen to stress that it still depends on inflation “playing nice”, so this is obviously a key factor to watch closely.”

Olsen agreed that there is the caveat element. “The bank says the pace of further easing will depend on the committee’s confidence that pricing behavior remains consistent with a lower inflation environment.”

He said the Reserve Bank may come back for the next update in October with a different view.

“Anyone who makes big bold bets is a brave person right now.”

rnz.co.nz