RBNZ Announcement: Change on Horizon for OCR Rates

On Thursday, the Reserve Bank of New Zealand (RBNZ) made its scheduled announcement as to the state of the Official Cash Rate (OCR).

So, what did the RBNZ announce and what can we take from it?
There are a few key points that can be made from the Reserve Banks announcement:

1. The New Zealand economy is on the up.
According to Wheeler “GDP estimated to have increased by 3 percent in the year to the September quarter”. This can largely be considered due to the burgeoning construction in Auckland and Christchurch driving the local economy, and globally the fact that “the major developed economies continue to recover and New Zealand’s export commodity prices remain very high”.

This may seem odd that the Reserve Bank is discussing construction activity in a positive light considering its recent macro-prudential regulation of the sector through the incoming LVR restrictions. However, they go on to address this, saying that “the Reserve Bank does not want to see financial or price stability compromised by continued high house price inflation. Restrictions on high loan-to-value residential mortgage lending, which will come into effect next month, are expected to help slow the national housing market.”

Essentially, the RBNZ considers construction and housing beneficial as they help the economy by providing jobs and sales etc. In contrast, the current inflation created by an overly saturated housing market destabilizes the economy. This is because individuals are taking on excess amounts of debt for properties that simply won’t be worth anywhere as much as they paid when the market ‘evens out’ again.

2. That the OCR will remain stable at 2.5% until at least early 2014.
Economists have been predicting that the OCR would remain stable through this review (as it has done since March 2011), so all in all this is fairly expected. However, what will be unexpected for some is the fact that the OCR is not going to rise in December, but rather will be held off until sometime next year. Wheeler opted not to indicate when, instead stating that “The extent and timing of the rise in policy rates will depend largely on the degree to which the momentum in the housing market and construction sector spills over into broader demand and inflation pressures.”

This means that interest rates will rise in 2014, and it may be worth locking in a lower rate before this happens, so that you don’t end up paying more than you need to. However, be aware that banks will be preparing for this and so as to avoid their profit margins being cut they may act well ahead of time- possibly in the near future.

3. Global economies are a bit of a mixed bag.
While there have been improvements overseas (as discussed), there is some fluctuation in the global economy that should be considered, with Wheeler stating “The global outlook remains mixed. GDP growth in Australia and China has slowed and some emerging market currencies have come under considerable downward pressure”.

Whilst the New Zealand economy is currently not experiencing these same pressures, with global trade a huge factor in our economy we are not immune to the downturns underway in Europe and as such should not be complacent. Essentially, this is just a quick reminder that whilst the outlook is positive, we are not ‘out of the woods’ just yet.

The bottom line:
It may be worth considering locking in a fixed rate before the 2014 rolls around- this way you’ll capitalize on the lower rates before they rise when the OCR does. Furthermore, if you are intending on purchasing a mortgage in the near future, it may be slightly more cost-effective if you do so sooner rather than later.

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