Earlier this month, Australia was the first developed-market central bank to cut interest rates, in hopes to ease the economic impact of the coronavirus outbreak. New Zealand just followed suit with the largest OCR cut on record.
Australia, the first responder
On 3 March, the Reserve Bank of Australia (RBA) announced it would be cutting the cash rate by 25 basis points to a record-low 0.50 percent. And interest rates could drop to as low of 0.25 per cent this week, according to Australian economists.
“The coronavirus has clouded the near-term outlook for the global economy and means that global growth in the first half of 2020 will be lower than earlier expected,” the RBA’s note read. While acknowledging that it’s not yet clear how persistent the effects of the coronavirus will be, RBA pointed out that the current uncertainty is already having a significant impact on the Australian economy, hurting domestic spending.
“The Board therefore judged that it was appropriate to ease monetary policy further to provide additional support to employment and economic activity,” the note continued, reassuring that the Australian economy is expected to return to an improving trend once the coronavirus is contained.
How are mortgage rates affected?
In the lead-up to the announcement, Australian Prime Minister Scott Morrison urged banks to pass on the rate cut in full to support the economy. Many banks responded positively, either announcing that they would pass on the full cut or lowering their rates on selected loans and new customers.
According to economist Trent Wiltshire, “Lower interest rates have offset rising prices over the past years. Even though prices are rising, paying off a mortgage on a property is easier.” New modelling shows that repayments on new mortgages for entry-level properties have become more affordable than a year ago, with first-home owners saving as much as $181 a month on their repayments.
In the meantime, with the coronavirus crisis hitting businesses, the focus is on the effect of rate cuts on business loans. The RBA governor has also been clear that – at current levels – rate-cut policies are exhausting their ability to make a difference. And representatives of prominent companies have been asking for the monetary stimulus to be supplemented by other measures, like direct support to business, infrastructure spending and investment tax breaks.
New Zealand: Larger OCR cut on record to 0.25 per cent
On Monday 16 March, nine days earlier than expected, the Reserve Bank of New Zealand (RBNZ) decided to cut its benchmark interest rates by three-quarters of a percentage point. The OCR dropped to a record low 0.25 per cent from 1 per cent, and RBNZ confirmed it would remain at 0.25 per cent for a minimum of one year, to support businesses and employment.
After acknowledging that the negative impact of the COVID-19 virus on the economy is and will continue to be significant, Orr pointed out that “several factors will continue to assist and support economic activity in New Zealand,” including a sound financial system and the Government’s expansionary fiscal policy.
In light of the latest developments, the Monetary Policy Committee has agreed to further support the monetary stimulus by reducing the OCR to 0.25 per cent, with plans to keep it at this level for at least 12 months. Should further stimulus be required, the Reserve Bank said a Large Scale Asset Purchase programme of New Zealand government bonds would be preferable to further OCR reductions.
How are mortgage rates affected?
Following the Reserve Bank’s emergency rate decision, major banks have passed on the full 0.75 per cent cut to their floating-rate customers. It’s not yet clear how much of an impact the new OCR level will have on fixed rates, though it’s not likely to be massive.
While these rate cuts are set to affect savers, they can give New Zealanders an opportunity to focus on repaying their mortgage faster. Once again, choosing the right mortgage structure is important, and our Mortgage Link advisers are here to help.
The importance of mortgage advice
What’s happening with the coronavirus outbreak goes to prove that lending conditions don’t exist in a vacuum. There are a number of factors at play, and that’s why talking to a mortgage adviser can be beneficial.
If any of your clients need guidance and advice on how to structure their mortgage, please get in touch. Mortgage Link advisers know the lending environment inside and out, and always stay on top of the latest developments to help New Zealand borrowers make well-informed decisions about their property finance.
To get in touch with the team at Mortgage Link, please contact:
021 835 506
Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current development or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.