Cash rate and interest rates head in opposite directions

by Maya Breen11 Nov 2016
The Reserve Bank of New Zealand (RBNZ) yesterday cut the official cash rate by 25 basis points to a record low 1.75%. 

None of the banks have dropped their interest rates in response, although some did increase them before the Reserve Bank’s announcement.  

ASB last week increased its three, four and five year fixed term mortgage rates and BNZ followed suit, raising its three year fixed mortgage rate.

Following the cash rate cut, BNZ said it would not be dropping its rates in response to the central bank’s call. 

Westpac also said it would not be changing its mortgage rates, according to Newshub. 

Westpac's general manager consumer bank and wealth Simon Power said, "Ongoing rises in the cost of offshore funding provide no opportunity to lower home loan rates at this time".

"The OCR is just one factor in assessing interest rates. Its importance is diminished when banks need to use offshore funds to cover the gap left by a lack of local deposits.

"In a period of global uncertainty, a number of factors become more influential than the OCR. These include the increased cost and lack of supply in the local deposit market, exchange rate risk and the increased capital requirements for investors,” Power said. 

Head of Century 21 New Zealand, Geoff Barnett warned buyers not to expect the latest OCR cut to result in further interest rate falls.

 “Some people reading the headlines may think things are only going to get better and that by the end of summer house prices will have levelled off and interest rates will be still be rock-bottom,” he said. 

“Well I challenge that assumption on both fronts. Prices will still increase in most parts of the country albeit not as steeply in Auckland, and interest rates will also go up in many cases, so now is the time to get in.” 

Barnett says the latest loan-to-value ratios (LVRs) and the rising fixed interest rates will “apply a bit of brake pressure” but notes it as a plus following unsustainable 25%-plus annual increases in some areas.

“The latest round of much tougher LVRs hitting the likes of property investors is having an impact for sure, but I actually believe these restrictions coupled with slightly higher interest rates probably make for a much more realistic real estate market.”

Barnett also said he was pleased that the Reserve Bank Governor had not made mention of introducing loan-to-income restrictions in the update.

“Let’s first see what impact any rising interest rates have on cooling the property market and lets also fully assess the latest LVRs impact before also adding loan-to-income restrictions,” said Barnett.

“Rest assured they might not ever be necessary and one thing’s for sure they’d only shut out the likes of teachers from ever buying a home.” 

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