The conflicting predictions on New Zealand’s OCR cuts and their impact on borrowers
While the Reserve Bank continues to jawbone and state that we will be well into the 2025 calendar year before we see a cut to the Official Cash Rate (OCR), it is questionable how many people actually believe them.
ANZ economists have revised their projections, anticipating the first cut to be advanced from May next year to February. Notably, former BNZ Chief Economist Tony Alexander has even suggested that we might witness the first cut as early as November this year, a potential game-changer for the mortgage market.
The 525 basis points (5.25%) of tightening implemented in this cycle clearly achieve the Bank's objectives. Anyone observing the employment market will see that we've transitioned from a few years ago, when employees were demanding significant pay increases, to now, when many are grateful to have a job in the face of widespread job losses.
The first quarter's GDP numbers were released late last week, and while we are technically out of a recession, it definitely does not feel that way. Spending surveys show that people plan to cut spending even further, which is likely to be a death blow to quite a few businesses already on their knees.
A recent paper from the Reserve Bank does suggest that the remaining inflation, which is why we have such high interest rates, may dissipate quite quickly as the unemployment rate continues to jump, and so, as written previously, the following cash rate review on the 10th of July is not likely to mean much as the Bank will be waiting firstly to see how the inflation numbers settle for the June quarter when the numbers come out on the 17th of July and then how many more people have lost their job when the updated unemployment numbers come out on the 7th of August.
The Reserve Bank is likely to stay quiet over the next month, but expect to hear a significant increase in commentary if the domestic side of inflation (non-tradables) decreases, indicating that the Bank should not be waiting as long as they have indicated.
Because of this, in most cases, I lean towards the 6-month rate, with many banks offering this rate on a special in the high 6% range. This gives the borrowers the ability to then look to ride rates as they drop over the 2025 and 2026 calendar years. For those of you with significant borrowing, you may want to hedge this with different term options in case unforeseen events keep rates higher for longer than expected.
