Reserve Bank’s 50 Basis Point OCR Cut: What It Means for Home Loan Rates
The Reserve Bank is likely to reduce the official cash rate (OCR) by 50 basis points. This is the final update for the year. Economists expect the bank will then cut rates by 25 basis points from February next year. They predict the OCR could reach around 3%, with retail rates ranging from 5% to 5.5%.
Forecasters warn borrowers not to expect significant reductions in home loan rates immediately. Gareth Kiernan, the chief forecaster at Infometrics, states the 50 basis point cut is already anticipated by financial markets. He believes fixed mortgage rates may only drop by around 10 basis points, while floating rates would likely decrease by 50 basis points, matching the OCR cut.
If the OCR cut is larger than expected, such as 75 basis points, it could impact the markets. Kiernan suggests this could add another 10 basis points to fixed rate reductions, potentially leading to total cuts of up to 40 basis points. However, wholesale swap rates for longer terms have risen recently, which may limit how much of the OCR cut passes through to retail mortgage rates.
Senior economist Kim Mundy from ASB aligns with Kiernan, noting that rising wholesale rates could hinder retail rate decreases. She expects further OCR cuts next year, but at a slower pace, which would slow the decline in home loan rates.
What are the potential long-term effects of OCR reductions on mortgage borrowing costs?
Interview with Gareth Kiernan on Reserve Bank OCR Reduction and Its Impact on Borrowers
News Directory 3: Thank you for joining us today, Gareth. The Reserve Bank is planning a 50 basis point reduction in the official cash rate (OCR). What does this mean for borrowers looking at home loan rates?
Gareth Kiernan: Thank you for having me. The anticipated 50 basis point cut is something that financial markets have already priced in. For borrowers, this means we may see some minor adjustments in mortgage rates, but we shouldn’t expect drastic changes right away. Fixed mortgage rates might only drop by about 10 basis points, while floating rates could decrease by 50 basis points, aligning directly with the OCR cut.
News Directory 3: That’s an interesting analysis. If, hypothetically, the Reserve Bank were to cut the OCR by 75 basis points, how would that alter the scenario?
Gareth Kiernan: A larger cut, such as 75 basis points, would definitely have more pronounced effects on the market. We might see an additional 10 basis point reduction in fixed rates, potentially bringing total cuts to around 40 basis points. However, it’s important to note that wholesale swap rates have already been rising, which could hinder the full transmission of these cuts to retail mortgage rates.
News Directory 3: We’ve heard similar sentiments from other economists. Senior economist Kim Mundy mentioned that rising wholesale rates could impede retail rate reductions. Do you foresee further OCR cuts next year?
Gareth Kiernan: Yes, I do believe there will be further OCR cuts next year, but they’ll likely be at a slower pace compared to what we’re seeing now. This gradual approach means that the decline in home loan rates will also be slowed down. Borrowers should remain prepared for a sluggish response in mortgage rate changes.
News Directory 3: How has the current market volatility been affecting lenders and borrowers?
Gareth Kiernan: The market is indeed quite volatile. We’ve seen some banks fluctuating their fixed rates—some have increased theirs, such as a six-month fixed rate going up to 6.49%, while others have decreased theirs to around 5.99%. This inconsistency reflects a broader uncertainty in foreign growth and inflation, leading to limited adjustments in mid-term rates and stable long-term rates.
News Directory 3: What advice would you give to borrowers navigating these changes?
Gareth Kiernan: Borrowers should brace themselves for slow-moving changes in mortgage rates, even with the potential OCR cuts. It’s vital to keep an eye on market dynamics and consider seeking advice from mortgage advisers to make informed decisions that suit their financial situations.
News Directory 3: Thank you, Gareth, for your insights. It’s crucial for borrowers to stay informed as these developments unfold.
Jeremy Andrews, a mortgage adviser at Key Mortgages, indicates the market is still volatile. Some banks have adjusted their fixed rates, both increasing and decreasing. For example, one bank raised a six-month fixed rate to 6.49%, while another lowered it to 5.99%. The movement in mid-term rates has been limited, and long-term rates have remained stable, reflecting uncertainty in foreign growth and inflation.
Overall, borrowers should prepare for slow-moving changes in mortgage rates despite potential OCR cuts.