A weakening job market and tepid inflation has led the Reserve Bank to cut the official cash rate (OCR) to an all time low.
On Wednesday the new monetary policy committee announced the OCR, which influences other domestic interest rates on loans and savings, was being cut by 25 basis points to 1.5 per cent, the lowest ever.
In response, the New Zealand dollar dropped sharply. Within minutes both ANZ and Kiwibank announced plans to lower mortgage and deposit rates in response to the news.
Economists at ASB said there was now around a 50 per cent cut of another interest rate cut. While it has forecast another cut in August, it said the risk was that the cut could come later.
Westpac chief economist Dominick Stephens said he believed the Reserve Bank statement suggested it was “genuinely open minded about whether to cut the OCR again or not”.
Stephens said the move would continue to push mortgage rates lower.
“We think the consequence will be an upturn in the housing market, starting in the second half of 2019.”
In a press conference at the Reserve Bank on Wednesday afternoon, Orr revealed that the decision of the committee to cut interest rates was unanimous, meaning no vote was required.
The Reserve Bank statement pointed to slowing global and domestic economic growth.
“Domestic growth slowed from the second half of 2018,” the Reserve Bank said in a statement,” the bank said.
“Reduced population growth through lower net immigration, and continuing house price softness in some areas, has tempered the growth in household spending.
“Employment is near its maximum sustainable level. However, the outlook for employment growth is more subdued and capacity pressure is expected to ease slightly in 2019. Consequently, inflationary pressure is projected to rise only slowly.”
Economists were split on whether the bank would cut interest rates or leave the OCR on hold, with the option to cut later.
The New Zealand dollar dropped around half a cent against the US dollar, buying around US65.65c, the lowest since November 2018.
Banks pass on the cuts
The move is good news for borrowers, but not so good for those with term deposits. Interest rates have been falling steadily for months as the outlook for interest rates weakened.
ANZ announced just minutes after the Reserve Bank announcement that it was lowering mortgage rates, which had already been falling in anticipation of lower interest rates.
From May 13, ANZ’s floating rate will be 0.1 per cent lower, while fixed-term rates are also being lowered.
“The current extreme low interest rate environment not only represents an opportunity for new home buyers to enter the market, but for existing home loan customers to pay off as much of their debt as possible,” ANZ managing director of retail and business banking Antonia Watson said.
ANZ also said it was also cutting deposit rates by up to the full 0.25 per cent.
“It’s important that people maintain healthy savings, but a lower cash rate will impact on deposit interest rates. We’re concerned that savers might seek higher interest rates through riskier investments and savings options,” Watson said.
Kiwibank has also announced cuts on a number of business and mortgage rates, as well as on deposit rates.
For the first time since the OCR was introduced in 1999, the decision was officially made by a committee of seven, including three people from outside the bank.
While the bank has insisted the decisions were previously made jointly by top officials, until now technically the decision has been made by the governor alone.
A summary of the meeting said that while inflation was near its target and employment was near its maximum sustainable level, recent figures has pointed to weaker domestic spending, slower growth and a cooling labour market.
It also warned of the risk to New Zealand from offshore.
“A key downside risk relating to the growth projections was a larger than anticipated slowdown in global economic growth, particularly in China and Australia, New Zealand’s largest trading partners.”