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Reserve Bank drops rates to an all time low

Written by Stuart Hawess on March 14th, 2016.      1 comments

 

The Reserve Bank reduced the Official Cash Rate (OCR) by 25 basis points to 2.25% 

 

Governor Graeme Wheeler said in a statement 

 

"The outlook for global growth has deteriorated since the December Monetary Policy Statement, due to weaker growth in China and other emerging markets, and slower growth in Europe. This is despite extraordinary monetary accommodation, and further declines in interest rates in several countries. Financial market volatility has increased, reflected in higher credit spreads. Commodity prices remain low.

 

Domestically, the dairy sector faces difficult challenges, but domestic growth is expected to be supported by strong inward migration, tourism, a pipeline of construction activity and accommodative monetary policy.

 

The trade-weighted exchange rate is more than 4 percent higher than projected in December, and a decline would be appropriate given the weakness in export prices.

 

House price inflation in Auckland has moderated in recent months, but house prices remain at high levels and additional housing supply is needed. Housing market pressures have been building in some other regions. 

 

There are many risks to the outlook. Internationally, these are to the downside and relate to the prospects for global growth, particularly around China, and the outlook for global financial markets. The main domestic risks relate to weakness in the dairy sector, the decline in inflation expectations, the possibility of continued high net immigration, and pressures in the housing market.

 

Headline inflation remains low, mostly due to continued falls in prices for fuel and other imports. Annual core inflation, which excludes the effects of transitory price movements, is higher, at 1.6 percent. 

 

While long-run inflation expectations are well-anchored at 2 percent, there has been a material decline in a range of inflation expectations measures.  This is a concern because it increases the risk that the decline in expectations becomes self-fulfilling and subdues future inflation outcomes.

 

Headline inflation is expected to move higher over 2016, but take longer to reach the target range. Monetary policy will continue to be accommodative. Further policy easing may be required to ensure that future average inflation settles near the middle of the target range. We will continue to watch closely the emerging flow of economic data."

 

 PROPERTY GAUGES 

 

Record-low mortgage interest rates, tight dwelling supply and booming net immigration continue to support the housing market. Nevertheless, prices remain stretched relative to both incomes and rents, particularly in our largest city, where prices have started to recede. Attention is now shifting to the regions, which are playing catch-up. Mortgage interest rates were broadly unchanged over the month, with a two-way risk profile given the influence of potential OCR cuts versus upward pressure on bank funding costs.

ECONOMIC OVERVIEW 

The economy is performing well right here and now, and we generally expect respectable growth over 2016; New Zealand is more than dairying, there are other bright spots, and the economy has better structural foundations now. But this central scenario is looking more precarious by the day, given the global scene. Risks are elevated and weaker export prices and higher global funding costs are a nasty mix for a commodity-dependent borrowing nation. It now looks like the OCR will head even lower as challenges mount.

MORTGAGE BORROWING STRATEGY 

Carded mortgage interest rates have barely budged since the end of last year. The cheapest part of the curve (particularly for lower-deposit borrowers) remains the one to two year tenors, where rates are historically very low and offer the best value. Borrowers could choose to spread fixed terms across one to two year tenors to stagger roll-overs, but we continue to have a preference for the two-year rate, which offers greater certainty at a historically low rate and offers slightly higher protection if pressures in credit markets filter through into fixed-term rates. With OCR cuts on the cards and no OCR hikes on the horizon, longer-term rates don’t offer the same value at present.

 

1 Comments

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