Mortgage rates drop, but further relief unlikely as OCR stabilises
This level of labour market slack usually keeps a lid on domestic inflation pressures.
The RBNZ isn't done with cutting rates just yet, but an important insight borrowers should take from last week's decision is that we are nearing the end of the easing cycle.
Of the big four Australian banks and Kiwibank, forecasts for where the OCR troughs range from 2.50% to 3%.
The most recent RBNZ projections imply a floor of either 3% or 2.75%, with the odds slightly tilted towards the latter.
Whoever you choose to believe, it's clear the bottom is getting closer.
For most of us, this matters because of what it means for borrowing costs and the household budget.
Mortgage rates have already fallen a long way. The two-year rate is 5% right now, down from 7% at the end of 2023.
It's important to understand that your mortgage rate isn't driven solely by moves in the OCR.
Global economic conditions, wholesale interest rates, bank funding costs and competition among lenders can also have a big influence.
There's still a strong relationship though, especially for the shorter mortgage terms.
In the past six months the gap between the OCR and the two-year rate has been about 1.5%, well below the average since 2017 of 2.2%.
That tight spread could mean there's less room for mortgage rates to fall, even if we do see another OCR cut or three.
The outlook could change if we experienced a global economic shock, or if inflation proved more persistent than expected.
However, right now, the base case points to limited further relief.
As our biggest lender, ANZ likely has some useful insights about the mortgage market.
Its latest monthly property report suggests the two-year mortgage rate will bottom at 4.9% later this year, only marginally below current levels.
It has the one-year slightly lower at 4.7%, while the three- and five-year rates don't dip below 5% in its projections.
This conservative outlook is notable, given ANZ (with Kiwibank) sees the OCR falling to 2.50%.
The upshot here is that most of the downward move in mortgage rates is behind us.
I wouldn't say this is 'as good as it gets' for borrowers, but we're much closer to that point than many think.
The next OCR decision is due in late August and importantly, this one will also see the release of a new forecast set.
This is the natural opportunity for the next cut, but there are a few things to monitor between now and then.
Next week's June quarter consumer price index (CPI) report is one, while the labour force report on August 7 will also be crucial.
Assuming those are close to RBNZ projections, there's a decent chance we see a 0.25% cut at that time.
That would take the OCR to 3%, close to neutral and where it sat comfortably for six years from 2010 to 2015.
The focus will then shift to whether that's as low as it goes this cycle.
With mortgage spreads already compressed relative to recent years and the OCR within neutral territory, borrowers hoping for much lower rates will be left disappointed.
Mark Lister is Investment Director at Craigs Investment Partners. The information in this article is provided for information only, is intended to be general in nature, and does not take into account your financial situation, objectives, goals, or risk tolerance. Before making any investment decision Craigs Investment Partners recommends you contact an investment adviser.
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Scoop
an hour ago
- Scoop
PM To Host Anthony Albanese In Queenstown
Rt Hon Christopher Luxon Prime Minister Prime Minister Christopher Luxon will host Australian Prime Minister Anthony Albanese for the annual Australia New Zealand Leaders' Meeting in Queenstown later this week. 'I look forward to welcoming Prime Minister Albanese and his fiancée Jodie Haydon to a beautiful part of New Zealand,' Mr Luxon says. 'In today's uncertain world, one certainty is that the Australia-New Zealand relationship is the bedrock as we look out into the world. 'Australia is our only ally and a vital economic partner. With two-way trade of $32 billion, I look forward to discussing what more we can do as we tackle economic challenges on both sides of the Tasman.' Prime Minister Albanese will be welcomed to Queenstown by Ngāi Tahu at a pōwhiri followed by bilateral talks. Other engagements include a business roundtable with the Australia New Zealand Leadership Forum and showcasing Central Otago's beauty. Prime Minister Albanese arrives in Queenstown on Saturday 9 August and departs on Sunday 10 August.
NZ Herald
an hour ago
- NZ Herald
Government overcooked spending during pandemic, against official advice, harming economy
This year's is on how fiscal policy – taxing and spending – should be used to respond to economic shocks. Treasury's calculation of the size of the Covid response. Graph / Treasury Its main finding, learning from the Covid-19 pandemic, was that fiscal policy should be used sparingly, with the Reserve Bank taking the lead on managing the economic cycle using its monetary policy tools like the Official Cash Rate. 'Polite, but its conclusions are damning' – Willis The report lands in the midst of a protracted economic downturn, with both the Government and the Opposition pointing the finger at each other over who is responsible. The Government blames Labour for excessive, inflationary and unsustainable spending that prompted the Reserve Bank to plunge the economy into recession with high interest rates. Labour blames the Government for cutting spending and axing infrastructure projects. Finance Minister Nicola Willis said the report validated the Government's concerns about Labour's spending. 'Treasury's language is spare and polite, but its conclusions are damning,' Willis said. 'The report makes clear significant errors were made in the fiscal response to Covid.' Finance Minister Nicola Willis said the report validated her concerns. Photo / Mark Mitchell Willis pointed in particular to Treasury's criticism of the last Government for spending the Covid-19 fund on things that were only tangentially related to the Covid response, such as the school lunch programme. The report said the fund was established in May 2020 to 'support a timely economic response and public confidence'. However, it added that 'as the economy recovered, the then Government was advised against further stimulating, in favour of more targeted support'. Willis said the Government 'ignored' that advice, favouring 'undisciplined spending that pushed up inflation, eroded New Zealand's previously low public debt position, and fuelled a cost-of-living crisis that many families are still suffering from'. Labour has been approached for comment. Just ahead of Budget 2022, the then Finance Minister Grant Robertson said the Government struck the right 'balance'. 'There were and are no costless decisions. Doing less would have seen unemployment grow, or put people's health at risk,' Robertson said. Treasury told Govt to ease up on spending Treasury outlined a history of its advice during the pandemic. It said that initially, it had encouraged the Government to spend money to support the economy through things like the wage subsidy. However in late '2020 and into 2021 ... Treasury started to move away from recommending broad-based fiscal stimulus to support the economy towards more targeted and moderate fiscal support'. After the 2020 election, Treasury said it informed Robertson that there was 'adequate' fiscal space to support the economic recovery and space for 'further temporary support if the economic or public health situation deteriorated'. However, officials also 'highlighted the importance of controlling ongoing spending and ensuring it was high value to meet the medium-term fiscal challenge'. By August 2021, the beginning of Auckland's long lockdown, Treasury warned that any support to businesses should 'take account of macroeconomic trade-offs'. By Budget 2022, Treasury said it was recommending 'against any further stimulus'. The briefing noted that five years on from the beginning of the pandemic, spending is still close to its pandemic-era peak and has only been partly offset by higher revenue. Higher debt-servicing costs are weighing on the Government's balance sheet and lower GDP has 'contributed to the deficit both directly, by leading to a smaller tax base and lower revenue than anticipated, and indirectly, as spending plans were based on revenue expectations that did not eventuate'. The Covid fund was closed in 2022, ending that era of stimulus and Budget 2023 ended up being more stimulatory than planned thanks to the Auckland Floods and Cyclone Gabrielle. Unlikely comparison between Labour Govt and Ruth Richardson The briefing made an unlikely comparison between the Labour Government of Dame Jacinda Ardern and Chris Hipkins and the fiscal policy of National Finance Minister Ruth Richardson. Treasury noted that fiscal policy can be counter-cyclical, which means it tries to counter and blunt the business cycle by, for example, spending money during a downturn to stimulate an economy, or saving during an upswing to cool an overheating one; or fiscal policy can be pro-cyclical – this means exacerbating a business cycle by spending money when an economy is hot or cutting back when an economy is shrinking. Treasury noted that the responses to the Asian Financial Crisis and the GFC had been accidentally counter-cyclical thanks to pre-promised tax cuts, however, fiscal policy was 'pro-cyclical in the early 1990s and during 2021-2023″. It said in the 1990s, 'pressures on fiscal sustainability motivated fiscal consolidation even as the economy was in recession'. In the case of the Covid response, the Government thought it was engaged in a counter-cyclical response to a 'severe economic downturn', however 'from late 2020, the economy turned out to be much stronger than expected (perhaps, in part, caused by the strength of fiscal stimulus itself)'. 'Combined with expenditure that was enduring rather than temporary, this resulted in large fiscal deficits while the economy was overheating.' The current Government is facing similar criticism for being pro-cyclical. Much like the Governments of the 1990s, it is trying to pull back spending to rebuild the balance sheet at a time of economic weakness. The Government was criticised for spending Covid money on school lunches. Photo / Liam Clayton How much was spent? Of the 20% of GDP spent on the pandemic, about half was spent on direct pandemic economic and health initiatives. Thirty-five per cent was spent on wage subsidies 'and similar schemes during lockdowns' and a further 18% 'arose from health-system costs such as vaccination and contact tracing, along with managed isolation and quarantine (MIQ) costs'. The parties that now form the Government broadly agreed with this spending at the time – National, at some points, called for spending on wage subsidies to be even greater. The remainder of the response was 'made up of a wide range of initiatives with varied objectives', Treasury said. Some initiatives were 'aimed at more directly responding to the impacts of Covid-19 and others aimed at providing fiscal stimulus or achieving social or environmental objectives'. These included tax changes, training schemes, housing construction, shovel-ready infrastructure projects, increases to welfare benefits, the Small Business Cashflow Scheme, Jobs for Nature, additional public housing places and school lunches. The then Opposition disagreed with much of this spending. Lessons for next time In a foreword to the report, Treasury Secretary Iain Rennie noted that increased use of fiscal support during shocks had 'contributed to public debt ratcheting up over time'. Rennie warned that if nothing changes, 'this leaves future generations with less financial capacity to respond to shocks'. The recommendations from the report note the Government needs to get better at saving money when the economy is booming to ensure there is fiscal space to support the economy when times are grim. When times are grim, the Government should allow the 'automatic stabilisers' to kick in, spending money on increased benefit payments. Managing the ups and downs of the economy should mostly be left to the Reserve Bank – a conclusion reached in Treasury's draft report, published earlier. 'Monetary policy changes can be reversed more readily and can often be implemented faster. The Government's spending and taxation decisions should generally seek to optimise long-run value for money rather than moderating economic cycles,' Treasury said. This does not mean there is no role for the Government. If monetary policy is constrained or at extremes – as it was at points during the pandemic – Government spending can kick in. Or, if interest rates can fall further, the Government could restrain spending to 'help moderate booms that would otherwise result in interest rates or the exchange rate becoming extremely high'. Treasury also said fiscal policy could be used to ease some of the distributional impacts of monetary policy, which can be blunt. Monetary policy during the pandemic was largely responsible for the housing boom and bust.
Otago Daily Times
an hour ago
- Otago Daily Times
Man jailed for six years for $1.7m Covid fraud
An Auckland man has been sentenced to almost six years in jail over a $1.7 million Covid-19 fraud. Luke Daniel Rivers, also known as Mai Qu, pleaded guilty to 29 charges including wage subsidy and small business cashflow scheme fraud, and money laundering. The schemes were set up to help businesses through the disruption of Covid-19 lockdowns. Rivers was sentenced in the Auckland District Court. Ministry of Social Development (MSD) group general manager of client service delivery George van Ooyen said the fraud was premeditated, sophisticated and solely for personal financial gain. It involved the use of forged documents. "The volume of fake documents and the repeated nature of the conduct, point to a significant degree of premeditation and sophistication. "What he did is an abuse of the Covid-19 relief schemes, solely for personal financial gain. "The wage subsidy was a high trust scheme providing rapid payments up front for businesses to keep their employees in their jobs and provide some form of financial security." Inland Revenue (IRD) spokesperson Bernadette Newman said he used forged documents to get IRD numbers for people who had never been to New Zealand. "Rivers used his specialist knowledge as an accountant to game the system. And he used the identities of more than 200 other people to carry out his scheme - all to maximise the amount of funds he could apply for," she said. "He abused both the public trust in the accounting profession and his clients' trust in him to keep their information private. "His tax offending is effectively ongoing as he hasn't remedied his failure to file GST and income tax returns for his four companies." Van Ooyen said MSD was still working to uphold the integrity of the wage subsidy scheme. "We have active investigations ongoing. Court outcomes and debt recovery will continue beyond this." "As of today, 46 people have now been sentenced with a further 49 people still before the courts. "We've also made civil recovery decisions in relation to 52 businesses. More than 25,000 repayments have been made, totalling $830.4 million." Newman said IRD had prosecuted 14 people for fraud involving Covid supports. "Eleven cases are progressing through the court system, five cases where defendants are awaiting sentence, and a number of active investigations around other Covid-19 support fraud cases. "Increased funding this year means IR can do more audits and debt collection work, and investigations into specific sectors can continue."
