Mortgage rates have already begun falling after the Reserve Bank cut official interest rates to 3.25 per cent and warned of more to come.
ASB and Kiwibank have immediately dropped their floating mortgage rates, with the rest of the banking pack expected to follow.
In what was seen as a close call, Reserve Bank Governor Graeme Wheeler has cut rates from 3.5 per cent to 3.25 per cent, instead of keeping them on hold as many expected. Another rate cut in future was also on the cards, but that would depend on “the emerging data”, Wheeler said. The New Zealand dollar was also “overvalued” and a big fall was justified, Wheeler said on Thursday. The kiwi fell against both the US and Australian dollars following the announcement.
Rapidly rising house prices in Auckland had been expected by some economists to stop the central bank cutting rates, with the risk of throwing more fuel on the fire. But further falls in dairy prices, slower demand and inflation near zero prompted Wheeler to act now.
In April, Wheeler had warned that rates could be cut if demand was weaker and inflation stayed low. Low inflation has already seen lower interest rates on fixed-term mortgage rates over late 2014 and into this year. Two-year fixed rates are under 5.5 per cent, well down from 6 per cent or more a year ago.
One-year fixed rates are also well down from last year to less than 5.5 per cent currently, after falling since March in expectation that the Reserve Bank would cut official interest rates this year. Wheeler said the bank would expect to see floating mortgage rates fall and some declines in two and three-year fixed rates. “There will be some adjustment, but a lot is already built in” Wheeler said, as markets had expected the rate cut on Thursday.
The Reserve Bank also hoped to see Auckland prices slow down, but ultimately building more homes “will solve the problem”.
In March, the Reserve Bank’s projections suggested short-term interest rates would remain flat till 2017. Latest projections out on Thursday suggest short term rates will be down a total of 50 basis points by the middle of next year, then remain low for at least a year.
The Reserve Bank raised interest rates by 100 basis point in the middle of last year, after they were slashed to an extremely low level of just 2.5 per cent in the wake of the Global Financial Crisis.
Wheeler also repeated that the New Zealand dollar remained overvalued.
After falling from its recent peak in April, a “further significant downward adjustment is justified”, Wheeler said.
A big drop in the New Zealand dollar would see import prices rise for consumers, with the first impact in local petrol prices.
The New Zealand dollar fell to a five-year low against the US dollar to be around US71c this year, and has also dropped sharply against the Australian dollar after hitting a record high of more than A99c in April.
The kiwi initially fell sharply against the US dollar after the announcement, reaching a low of US70.2c but recovered quickly to US71c and is now at US70.6c.
Against the Australian dollar it fell to below A91c and recovered to A91.4c. It was sitting at A91.2c about 9.30am.
BNZ currency strategist Raiko Shareef said it was a knee-jerk reaction and the quick recovery was due to the market having already priced in an easing of 50 points by July.
The Reserve Bank said cutting the cash rate was “appropriate” given low inflation and expected weaker demand in the economy.
The fall in export commodity prices that started in the middle of last year was now proving “more pronounced”, Wheeler said.
The weaker prospects for dairy prices and recent rises in petrol prices would slow income and demand growth and meant that inflation may be slow to return to the central bank’s target mid-point of 2 per cent.
“There is little evidence that export prices are about to recover,” Wheeler said.
Despite cutting rates, Wheeler noted that house prices in Auckland continued to rise rapidly.
QV figures out this week showed a meteoric rise in Auckland prices, up more than 16 per cent in the past year. But price rises have been cooling outside of Auckland.
But Wheeler said the central bank’s proposed measures to tighten up on lending to investors in Auckland and the Government’s tougher tax stance on property speculation should ease the impact of investor activity in the market.
And the Reserve Bank is expecting house price inflation to slow down over the next couple of years as more new homes are built and the migration boom rapidly fades away.
While a lower cash rate risks throwing more fuel on the fire of rising house prices in Auckland, almost 80 per cent of loans are now on fixed rates. Just 26 per cent of loans are now on floating rates.
Overall, the New Zealand economy was growing about 3 per cent a year, supported by low interest rates, a migration boom and building work as well as the fall in fuel prices late last year.
Inflation had been low due to falling import prices, while wages and inflation expectations were “subdued”.
Lower official interest rates would help inflation return to “target”, hitting around 2 per cent by the second half of next year, from 0.1 per cent currently.
But a key part of that return to the middle of the target is expected to come from higher import prices as the New Zealand dollar falls.
11th June 2015