July OCR Announcement – what you need to know…

According to the RBNZ announcement, ‘restrictive monetary policy has significantly reduced consumer price inflation, with the Committee expecting headline inflation to return to within the 1 to 3 percent target range in the second half of this year.’  Adding however that ‘The Committee agreed that monetary policy will need to remain restrictive. The extent of this restraint will be tempered over time consistent with the expected decline in inflation pressures.’

While it was expected that the OCR would remain unchanged following this review, the tone of the announcement indicates that things are heading in the right direction, which implies that we might perhaps see some easing of the monetary policy in the near future and a potential rate cut this year.  

Impact of the OCR announcement on mortgage interest rates

The more ‘dovish’ tone in the latest announcement will be welcomed news for many property owners. With unemployment rates sitting at 4.3% for the March quarter, and overall consumer and business confidence levels continuing to fall, it has led to many Kiwis tightening their belts and adopted a ‘wait and see’ approach to spending.

This has been reflected in a drop in everyday spending, alongside larger investments such as housing and car sales. According to Quotable Value, average housing values declined for a second month in a row in June, while the New Zealand Motor Industry Association released statistics showing the lowest levels of car sales seen in more than a decade.

While the RBNZ hasn’t explicitly stated that we will see interest rates cuts in 2024, many economic forecasters now predicting cuts before the end of the year, which will mean there is some hope on the horizon for property owners that we may see interest rates falling in the coming months.

Another sliver of good news for landlords this month has been the bright-line property rule application changing to two years, and the re-introduction of rental income interest deductibility for landlords, both of which came into force on July 01. However, with interest rates remaining high, it is a tough market out there for many homeowners and property investors alike.

Overall, we see this as encouraging announcement, which further supports our view that first OCR cut is likely to be in November.  We may also see a slight fall in wholesale interest rates, noting that the markets have now fully priced in the first OCR cut for November (with the market also pricing in the chance of an earlier cut). 

This means that, for most clients taking out new lending (or who’s rates are coming up for renewal), we are continuing to recommend that they fix for six months and wait to see what happens to rates throughout the rest of this year.

Based on the general consensus of economic forecasts, we are not recommending that clients fix for longer than 12-months at this time.

What to do now

For those clients who are feeling the pinch from continued high rates, we recommend talking to your mortgage adviser to see if there are ways to help ease the pain. Options such as transitioning to interest-only payments, extending your loan term or establishing a revolving credit buffer may help you to ride out the storm until interest rates become more favourable.

By taking into account economic forecasts alongside your financial circumstances and objectives, your adviser will be able to recommend the right loan structure for you.