Future cash rate cut unlikely to impact fixed rates, adviser says

by Maya Breen14 Oct 2015
A future cut to the official cash rate is unlikely to have an effect on fixed rate mortgage deals, says mortgage professional.

The Reserve Bank governor Graeme Wheeler announced this morning a probable cut to the official cash rate in late October – which would make it the fourth consecutive cut since June this year – despite concerns that it would fan the flames on house prices.

Wheeler said in an address to the Institute of Finance Professionals NZ in Auckland that “recent economic indicators have been more encouraging” and “some further easing in the OCR seems likely but this will continue to depend on the emerging flow of economic data".

“At the same time however, we remain conscious of the impact that low interest rates can have on housing demand and its potential to feed into higher price inflation.”

Professional Financial Solutions financial adviser Ravi Mehta doesn’t think it’s likely a cut to the OCR will mean lower fixed rates for borrowers.

“I’m quite sure the official cash rate will be cut and maybe we can expect two cuts within the next three months but will those cuts definitely translate into lower fixed rates? I doubt it,” he told NZ Adviser.

“The fixed rates are more influenced by the international markets and lead by the OCR, so maybe the floating rate will definitely go lower but what will happen to fixed rates can’t be predicted.   

“The market already knows this OCR cut is coming but unless the fixed rates go down further… there will not be any significant effect on the market, the market will stay the same as it is now.”

The governor said, “We have used macro-prudential policy instruments and some prudential management interventions to help reduce the risks to the financial system and broader economy associated with a potential correction in Auckland house prices.

“Although financial stability considerations are secondary to the price stability objective in the PTA, housing market considerations do influence our thinking on the OCR.”

Mortgage supply company financial adviser David Windler told NZ Adviser even if the cut to the OCR results in lower interest rates and may fuel the housing market, it’s important to remember the other hurdles involved for mortgage seekers.

“The pertinent point to borrowers is whilst a cut in the cash rate may well flow through to reduced interest rates, the borrowers still have to jump the servicing rate threshold to get the approval rate that they’re looking for,” Windler says.

“Borrowers will have to have the ability to measure up against how lenders are assessing their income and affordability and they’re certainly doing that a little bit more closely given the responsible lending code. It’s only once they jump those hurdles that they can actually get a good rate.”

The kiwi dollar dropped as much as 1.1 percent, the biggest decline since Sept. 21, after Wheeler said interest-rate cuts seem likely even as recent economic indicators have been more encouraging.

The currency slid 1.1 percent to 66.47 US cents this morning. The decline was the first in 11 days.

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