Brexit means August OCR cut likely

Mortgage Rates

News that the UK has voted for Brexit has shocked commentators and rocked financial markets globally.

Investors and KiwiSavers are being urged not to panic, but what could Brexit mean for New Zealand’s interest rates?

While economists warn it is far too soon to tell what the broader financial impacts might be, most are united in the view that an OCR cut in August is now much more likely.

ASB economist Daniel Snowden said the US Federal Reserve may now pause for thought on its next rate hike and, instead of potentially moving in July, it may wait till later in the year.

Doing so would keep the NZD elevated against the USD for longer and increase the pressure on the Reserve Bank to cut again in August.

“This reinforces our view of a 25bp rate cut in August, followed by a final cut to 1.75% in November,” he said.

“Prior to the Brexit vote, we had become less confident of the second cut.

“However, the global outlook is now marred by uncertainty and we expect to see declines in global commodity prices, further adding to the global deflation impulse.”

The Reserve Bank cut the OCR in March for two main reasons, BNZ senior economist Craig Ebert said.

They were falling inflation expectations and worries about the world economy amid market turmoil at the time.

Ebert said that, to date, currency has not done its job as a monetary buffer to global risk and, for this reason, the Brexit vote must increase the odds of the Reserve Bank easing the OCR further.

“We already forecast two more OCR cuts from the RBNZ – partly premised on global risks.

“Today we up the odds of an August cut to 75%, from 60%, while nudging the odds of a further cut by November up to 60%.”

New Zealand’s relative economic strength should serve it well through the current period of uncertainty.

ANZ chief economist Cameron Bagrie said New Zealand has excellent momentum, which is a big difference from prior to the Asian crisis and GFC when the economy was already losing speed.

“We believe the domestic growth impact will be minor, although it is certainly a moving feast.

“Nevertheless, it does of course increase the odds of an August OCR cut, at a time when we were wavering on whether a further cut was even required.”

However, while the odds are on for further OCR easing in the near future, that may not necessarily translate into lower mortgage rates.

Westpac chief economist Dominick Stephens agreed that Brexit has upped the chances of an August rate cut from the Reserve Bank.

“Markets pricing has moved decidedly in favour of an OCR cut to 2% in August - and a chance of the OCR falling below this.”

But New Zealand is likely to feel the impact of Brexit most immediately through exposure to international financial markets, he said

“To date, the NZ dollar and New Zealand interest rates have fallen, and credit spreads have risen, which will push bank funding costs higher.”

In his view, this means that although two-year swap rates are falling, mortgage rates and business lending rates are unlikely to fall as far or may not fall at all.