RBNZ Predicts Faster Economic Impact from Rate Cuts

Highlights:

• Rapid Mortgage Repricing: 70% of New Zealand mortgages will be repriced within 9-12 months, accelerating the impact of rate cuts on the economy.
• OCR Reduction: The Reserve Bank of New Zealand has cut its official cash rate to 5.25%, with further cuts expected this year.
• Restrictive Financial Conditions: Despite falling mortgage rates, the RBNZ still considers current levels restrictive, though major banks have begun lowering rates.

Mortgage Rate Reductions to Pass Through Quickly

The Reserve Bank of New Zealand (RBNZ) expects that falling interest rates will impact the economy more rapidly than in past easing cycles. Assistant Governor Karen Silk informed Parliament's Finance and Expenditure Committee that around 70% of mortgages will be repriced within the next nine to twelve months, which is a much higher percentage than previously seen. This quick turnover in mortgage rates, alongside reductions in business lending rates, is anticipated to accelerate the economic effects of rate cuts.

Silk highlighted that while only a little over one-third of New Zealand households carry mortgages, these households typically have higher incomes. Consequently, they represent 60% to 65% of the country's total household income, making them a significant driver in the economy's response to rate changes.

RBNZ Continues Easing Monetary Policy

On Wednesday, the RBNZ reduced its official cash rate (OCR) from 5.5% to 5.25%, marking a continued effort to stimulate the economy. The central bank has also signaled the possibility of further cuts before the year ends. Despite the rate cuts, the latest Monetary Policy Statement (MPS) from the RBNZ suggests that household consumption is likely to slow down for the rest of the year due to persistent high interest rates, a weakening housing market, and a softening labor market.

Financial Conditions Loosen, But Remain Restrictive

The MPS noted a loosening of financial conditions since May, with mortgage and term deposit rates falling across all terms. However, mortgage rates for one to two-year fixed periods, which are popular among new borrowers, have only dropped by about 30 basis points since May. Despite these declines, the RBNZ still views current mortgage rate levels as restrictive.

Major banks, including ASB Bank, have responded by lowering their floating and fixed-term mortgage rates, with reductions ranging from 10 to 34 basis points. This easing in financial conditions is expected to continue as market pricing indicates an increased likelihood of further OCR reductions, driven by expectations of inflation returning to the RBNZ’s target range of 1% to 3% later this year.

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