Watch JB's latest OCR analysis below, or keep scrolling to read the full article:
The Reserve Bank (RBNZ) dropped the Official Cash Rate (OCR) by a further 0.25% on 28 May, bringing it down to 3.25%.
It’s the result we were expecting. The RBNZ is just sticking to the roadmap laid out by ex-Governor Orr back in February i.e. a series of small, incremental cuts intended to get us down to at least 3.00% by mid-year.
Until it has a new (permanent) leader at the helm, we’re probably not going to see much deviation from that plan.
What was kind of surprising about this week’s announcement was the lack of movement in the RBNZ’s interest rate forecast.
Large parts of the market—me included—had expected to see it revise its estimated ‘neutral’ OCR from 3.00% down to 2.75%, reflecting the ongoing weakness in the New Zealand economy and all the global uncertainty out there with Trump’s chopping and changing on trade tariffs.
That hasn’t eventuated this time round, but I suspect it will at the RBNZ’s next full Monetary Policy Statement in August. Time will tell.
How will this week’s OCR cut translate through to mortgage rates?
Rates at the really short-term end of the spectrum—a.k.a. floating and six-month fixed rates—move in line with changes to the OCR, so we should see those reflect the full 0.25% drop pretty quickly.
Beyond that, the reduction is largely priced in.
Some banks have already dropped their one-year fixed rate to 4.89%—an improvement on the (already competitive) 4.99% rate on offer in recent weeks—and I’d say that’s probably as good as it’s going to get for now.
Bank margins on the one- and two-year terms (i.e. where mortgage rates are sitting relative to wholesale rates) have fallen significantly since the start of the year, and are now running at around 1.80%, which is about as low as the banks will be prepared to go.
Until we see wholesale rates come down a bit further, which would happen if the RBNZ were to drop its ‘neutral’ forecast, there’s not going to be a lot of room for movement.
What does a good mortgage rate strategy look like in this environment?
Splitting your loan across a mix of short- and longer-terms is a smart way to go.
Having part of your loan locked in for longer (say, two or three years at 4.99%) gives you interest rate certainty over that portion, while keeping the remainder on a shorter-term means being able to take advantage of lower rates, sooner.
Given that we’re unlikely to see much (if any) further downward movement in rates from here, I’d say there’s no harm in going ahead and locking in ASAP.