After a long run of bad news, the Reserve Bank of New Zealand’s (RBNZ) decision to cut the official cash rate (OCR) by 0.25% to 5.25% is a ray of sunshine in the current gloom.

The bank’s rate cut announcement comes almost a year ahead of its own projections, prompting an expectation of more easing through to the end of 2025.

But that doesn’t mean borrowers should start popping corks just yet. RBNZ expects the recession may last a little longer and that the unemployment rate hasn’t yet peaked (they’re picking 5.5% at some stage next year). Little wonder house prices aren’t expected to show much growth.

However…….

The corner maybe closer than many think

Independent economist Tony Alexander’s survey of real estate agents and mortgage brokers indicates that buyers – including investors – are returning to the market. He’s picking a house price rise before the end of this year as fixed mortgage rates head towards sub-5% territory.

In the meantime, banks are fighting for customers. Within minutes of the Reserve Bank’s announcement last week, Kiwibank reduced its variable rates by 25bps, passing on the full cut, and ASB dropped its floating and fixed rates. Its 18-month term dropped by 34 basis points. Several other banks have shifted their shorter fixed-term rates lower.

Economists predict ongoing downward pressure on wholesale and retail interest rates. “Probably the most important implication from the announcement, alongside the OCR itself, was green lighting ongoing steady and potentially aggressive cuts through this year and into next,” BNZ chief economist Mike Jones, said. “I think they’ve paved the way pretty well for interest rates to keep falling. It’s now regarded as what is needed given the changes to the economy and the inflation outlook that were basically rubber-stamped today.”

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

“Today’s small cut 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 it will encourage investors struggling with high costs to stay in the business. Better still, it will encourage investors who have been holding off buying new properties to get back into the market, increasing the number of properties available for rent”.

Confidence boost

Business confidence is on the up. ANZ’s most recent Business Outlook survey highlights a growing thread of optimism – a trend that precedes the OCR rate cut. Business confidence jumped 21 points to +27 in July, with firms’ expectations of activity lifting 4 points to +16.

However, ANZ chief economist Sharon Zollner qualified the results as “well, can’t get any worse vibe,” and highlighted a range of economy-wide indicators that were looking soft. “But the evidence is mounting that the inflation dragon is on its last legs, which sets the New Zealand economy up for a more robust recovery than if the job were half done,” Zollner said.

Kiwibank chief economist Jarrod Kerr said the focus now is on the magnitude of rate cuts needed. “They’re cutting back to neutral,” he said. “We are going to see 250 basis to 300 basis points of rate cuts in this cycle and that’s what’s going to get the attention of businesses and that’s what’s going to get the attention of households”.

The screws are being loosened on high interest rates and confidence is up. Looking to sell?  Call 0800 GOODWINS for an appraisal.