Change in the wind - an economic update

Close up image of calculator and pen, sitting on paper with numbers.

It wasn’t that long ago that most economists and experts were expecting the OCR to be as low as 0.25% by the end of 2020.

The expectation from most banks was that the next cut in the OCR would come as early as February 2020. However, as mentioned in earlier articles, with banks now positioning themselves with a more appealing one-year fixed rate than the two-year rate, we might be seeing a change in the wind.

Capital requirements

There has been plenty of speculation around what the Reserve Bank’s announcement will be next week, on the future capital requirement for banks.

Banks have always threatened a re-balancing in rates between mortgages and deposits, and the capital report from the RBNZ may force that into reality. As mortgage rates are at an all-time low, so are deposit rates which makes it extremely hard for banks to attract savers. Banks are expected to fund parts of their lending books from domestic investments and if this requirement increases, we should then see deposit rates also increase which naturally means an increase in mortgage rates too.

We’ve already seen some of the banks increase their two-year fixed rates to 3.55%, including SBS who were for a long time offering 3.39%.

We’ve also seen smaller lenders in the New Zealand market increase their extremely low rates, one being HSBC and it won’t be long until the rest of the Chinese banks follow suit.

What’s next?

Currently, it’s possible to lock in 3.45% for two-years, and this may be the best option to consider. Yes, the one-year term at 3.39% from the top five banks is still lower, however the two-year term would give better consistency if rates do increase.

Economists and experts were predicting the OCR to be as low as 0.25% by the end of 2020, but yesterday ASB released an outlook prediction to say that they now expect only one OCR cut next year, given the unexpected early positive growth in the GDP.

How does this impact me?