By Bernard Hickey
The Reserve Bank of New Zealand has again held the Official Cash Rate (OCR) at a record-low 2.5% as expected and has pledged to keep it there for all of 2013.
The bank said the interest rate outlook was finely balanced with the strong New Zealand dollar keeping imported inflation low, but with the Christchurch rebuild and stronger house prices threatening to boost inflation over the medium term.
Governor Graeme Wheeler warned he may have to cut the Official Cash Rate if the currency became even more over-valued. He also said he was concerned about a doubling of high loan to value ratio (LVR) lending to around 30% of all new lending over the last year. See more here in this article.
The Reserve Bank is looking at creating so-called macroprudential tools to try to slow the housing market without slowing the rest of the economy. These could include limits on LVRs and forcing banks to hold more capital for mortgage lending. See more articles here on such LVR tools.
The bank is currently consulting on these tools and may be in a position to use them by the end of this year, although opinion is divided on whether the bank will actually use them. Wheeler said in December he wouldn't use them even if he had them because house price inflation wasn't fast enough, although he didn't repeat that today.
What does this mean for rates?
The Reserve Bank said more relaxed international markets had reduced the funding costs for banks, which was being passed on at least partially to borrowers in the form of slightly lower mortgage rates over the last year.
It forecast the 90 day bill rate to rise around 1.3% to 4% by early 2016, which was a slightly more aggressive interest rate track than in its December forecast when it forecast the 90 day bill rate at 3.3% in the March quarter of 2015. This time it extended the track to the March quarter of 2016 and saw it increasing to 4.0%. Economists forecast rates will rise around 1.5% to 2% through 2014 and 2015.
Advertised floating mortgage rates have been broadly unchanged at around 5.7% since March 2011 and are likely to stay that way until at least until early 2014, given the Reserve Bank's comments in the March quarter Monetary Policy Statement.
However, borrowers can often get cheaper deals through their brokers because the banks are competing hard for business. The Reserve Bank has forecast the 90 day bill rate, which is the basis for floating mortgage rates, will only start rising from early 2014, and then rise around 1.3% by early 2016. This suggests a peak for floating rates at around 7%.
Fixed mortgage rates have been relatively stable in recent months and are now at or below floating rates, making the fixed vs floating decision a tough one. Fixed rates depend more on wholesale interest rate moves rather than the OCR and they have been nudging higher in recent weeks on hopes for a global economic recovery. But banks have held their rates low because their own funding costs have fallen.
The fixed vs floating decision depends on your outlook for the OCR and your personal situation. See more here in my Fixed vs Floating guide.
A flat to falling OCR makes floating more attractive, while a fast rising OCR makes fixing more attractive. In my view, the OCR is flat for now. It may rise next year, but not quickly.
What does this mean for the property market?
The prospect of lower interest rates for longer is encouraging many first home buyers to borrow and buy, particularly in Auckland and Christchurch where migration and a shortage of undamaged and watertight buildings is putting upward pressure on house prices. Some new building has started in Auckland, but remains below expected demand from migrants from Overseas and from the rest of New Zealand.
The Reserve Bank forecast house price inflation of 6.2% and 3.6% nationwide in 2013 and 2014 respectively after growth of 6% in 2012. Elsewhere in New Zealand, where there is more housing supply and less migration, house prices are subdued.