What You Need to Know About the RBNZ’s OCR Cut

A jittery response just now from the RBNZ.

The Official Cash Rate is cut to 1.50% (from 1.75%). A record low for New Zealand.

The RBNZ release mentions the employment outlook and global growth concerns. It goes on to flag domestic growth, reduced population growth and ‘continuing house price softness in some areas.

I know people in Auckland who are finding it very difficult to sell their home. This pain goes beyond the stats. Previously, the Reserve Bank Governor has expressed concerns over mortgage multiples. Capital requirements for banks are being increased. And we know, alongside Australia, household debt to GDP is very high.

Our read? Maybe we’re closer to the cliff edge of a crumbling property correction…and in an economy that is invested too much in that sector.

We’re a small commodities export economy — heavily holding its wealth in housing — trying to make its way in a volatile global trade environment.

But I’m surprised. I thought we were further from the cliff; on more solid ground. Here’s our discussion this morning in the office:

Me: ‘Think they’ll leave it at 1.75, which won’t be very exciting.

Taylor: ‘Think so?

Me: ‘That’s my guess. He needs room to lower it much more if the property market crashes. I think he’ll mention potential rate cuts coming to jawbone activity.

Taylor: ‘Agreed. Hard to rationalise a 1.5% OCR at this level of economic performance…but who knows what Orr’s thinking…

Following others gently down?

The other day, the Reserve Bank of Australia held their cash rate at 1.50%. The primary reason seems to be inflation was lower than expected. The labour market is tight, but real wages remain constrained. The continuation of a dramatic Australian property slide remains terrifying.

The Bank of England kept its base rate on hold in February at 0.75%. They have enough to contend with in Brexit, despite some green shoots in the UK.

The US Fed has signalled it would keep rates at 2.50% through 2021.

The US approach is a surprise since their economy has been smashing it. Perhaps they’ve been listening to Mr Trump, who advocates for constant lower rates to further stimulate the economy.

But that’s the new wave in economic management for countries like ours with aging populations. Keep rates low. Keep everything on life support. And that’s why we have experienced an extended ‘buy and hold’ bull market in stocks.

The trouble is we can’t afford for it to end. [openx slug=inpost]

The OCR impacts us all

My wife chats to a local on the ferry. He’s thinking of lending his kids some money so they can get into the housing market. ‘There’s not much point leaving it in the bank,’ he says. ‘The interest rate is nothing.’

Following the OCR announcement, ANZ and Kiwibank just announced cuts to deposit and lending rates.

Meanwhile a friend stresses over not being able to sell her home. She’s bought another in the same neighbourhood on bridging. And the interest payments are hurting.

There should be a little relief in sight for those on floating rates.

At night, I sit at my trading desk. I buy shares in the global markets. Forex is a big part of my strategy. Hedging adds a cost, so if you can predict the movements, you can potentially add return.

Previously, the NZD was strong against others. Did some good trades: AUD.NZD around $1.03. GBP.NZD around $1.85. GBP.NZD now looks about to close on $2, despite Brexit concern.

And so, our economic lives are affected by one rate — the OCR.

It directly impacts:

  • Savers trying to get a return on their savings
  • Borrowers paying down mortgages and other loans

It indirectly affects:

  • Forex traders. When New Zealand interest rates fall, our dollar typically falls. The interest rate differential here becomes lower, so Japanese grandmothers (and other global investors) don’t want as much money here.
  • Investors. A weaker NZD and lower interest rates fuel a tailwind for the share market. Savers hunt for better yields from stocks. Foreign investors find our stocks cheaper.
  • Travellers. A weaker NZD relative to the countries you travel to makes your trip more expensive.
  • Exporters and importers. Good for exporters because their NZD goods seem cheaper. Bad for importers facing higher real prices.

Where are we heading now?

It might be a happy time if you’re already holding plenty of forex and shares.

Glancing at a couple of old dividend mainstays on the NZX, like Spark [NZX:SPK], I see strong depth of buys. Where else are you going to get yield?

And it’s time to watch the global environment and see if our cash rate is going to go even lower against major economies.

I’ll be cautiously watching the property market in Auckland too. Not sure a small interest rate cut (nor the prospect of more) will make too much difference when the fundamentals of the market itself are changing.

Whenever there’s a change to financial dynamics, there are also instruments to capture the upside and defend against the downside.

Stay with us as we navigate choppy waters ahead.

Regards,

Simon Angelo
Analyst, Money Morning New Zealand

Important disclosures

Simon Angelo owns shares in Spark [NZX:SPK] via wealth manager Vistafolio.


Simon is the editor of Wealth Morning and has been investing in the markets since he was 17. He recently spent a couple of years working in the hedge fund industry in Europe. Before this he owned an award-winning professional services business and online learning company in Auckland for 20 years. He has completed the Certificate in Discretionary Investment Management from the Personal Finance Society (UK), has written a bestselling book and manages global share portfolios.


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