OCR to be kept at an 'expansionary level for a considerable period', with the RBNZ Governor sticking to his line that the next move could be 'up or down'

The Reserve Bank has kept the Official Cash Rate at 1.75% as expected, reiterating it will remain at this level "through 2019 and into 2020."

Governor Adrian Orr has also maintained his position that the next move could be up or down. 

Economists regard his "neutral" stance as little changed from the last OCR review in August.

Here is Orr's statement:

"We expect to keep the OCR at this level through 2019 and into 2020. The direction of our next OCR move could be up or down.

"Employment is around its sustainable level and consumer price inflation remains below the 2 percent mid-point of our target, necessitating continued supportive monetary policy. Our outlook for the OCR assumes the pace of growth will pick up over the coming year, assisting inflation to return to the target mid-point.

"Our projection for the New Zealand economy, as detailed in the August Monetary Policy Statement, is little changed. While GDP growth in the June quarter was stronger than we had anticipated, downside risks to the growth outlook remain.

"Robust global economic growth and a lower New Zealand dollar exchange rate is expected to support demand for our exports. Global inflationary pressure is expected to rise, but remain modest. Trade tensions remain in some major economies, increasing the risk that ongoing increases in trade barriers could undermine global growth. Domestically, ongoing spending and investment, by both households and government, is expected to support growth.

"There are welcome early signs of core inflation rising towards the mid-point of the target. Higher fuel prices are likely to boost inflation in the near term, but we will look through this volatility as appropriate. Consumer price inflation is expected to gradually rise to our 2 percent annual target as capacity pressures bite.

"We will keep the OCR at an expansionary level for a considerable period to contribute to maximising sustainable employment, and maintaining low and stable inflation."

The OCR has been at 1.75% since November 2016.

Gap between NZ/US benchmark rates the widest ever 

Meanwhile the Federal Reserve on Thursday morning (NZ time) hiked its benchmark rate for the third time in 2018.

At 2.25%, its rate is 50 points above that of New Zealand. This is the largest difference ever. 

The New Zealand dollar spiked a little against the US on the Fed's news, before retreating and then jumping briefly on the RBNZ's announcement. 

The movements were all minor; ANZ economists Sharon Zollner and Liz Kendall saying the RBNZ's review "appears to have been successfully geared to generate little market reaction".

The NZD remains relatively weak in the bigger scheme of things, sitting at 66.6 USc (as at 10.45am). 

Orr wouldn't risk coming out less dovish or more hawkish

Kiwibank economists Jarrod Kerr and Jeremy Couchman described the RBNZ's statement as: "as unchanged as unchanged gets on an unchanged day".

"The RBNZ’s statement gave a little, then took a little, but reaffirmed us of the current OCR trajectory," they say.

"To everyone in New Zealand, and those trading Kiwi instruments internationally, the cash rate is going nowhere for two years. The message is clear. And the message is consistent.

"Yes, we have seen an upside surprise in the (old) 2Q GDP numbers. Yes, business confidence has bounced back a bit, after seemingly voting no-confidence in Government policy directives. And yes, the US and Global economy hasn’t imploded under Trump’s tit-for-tat tariff tirade (alliteration at its best).

"But risks remain.

"The RBNZ Governor would not risk coming out less dovish, or more hawkish – pick a bird, basically more upbeat. Because Orr knows better than most, that a slight tilted change to the upside would have sent interest rates (expectations) higher, and the Kiwi flyer higher.

"We don’t need higher interest rates yet, and we don’t want higher exchange rates yet, either.

"Accommodative the RBNZ are, and accommodative the RBNZ will stay, well into 2019."

Will inflation pressures hit sooner than the RBNZ expects?

ASB chief economist Nick Tuffley retains his view that inflation pressures will pick up sooner than the RBNZ has been forecasting. 

"In particular, we expect a greater degree of wage inflation and subsequent flow-through to consumer prices. That is why we expect that when the OCR eventually rises, it will occur sooner than the late-2020 indication from the RBNZ," he says. 

"But the near-term risks are skewed still towards a lower OCR, primarily if growth does not live up to RBNZ expectations. 

"Although the RBNZ will have been pleasantly surprised by the strength of Q2 GDP, continued soggy business confidence will keep it wary about the growth performance for the rest of 2018 - particularly the tail end of the year."

ANZ economists see the OCR on hold for the foreseeable future.

"But with inflation still low and the activity outlook uncertain, the RBNZ stands ready to act should the activity outlook disappoint," they say.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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94 Comments

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10

Is Orr subscribing to the growth effect where you keep OCR low, pump growth as hard as possible, right up to the crash, which means any recessions are minimised due to past growth?

Works until you realise that we have no tools to fight the next recession...

My conspiracy theory is Orr is trying to pump up the local banks until they crash with the next recession then we bail them out and in-turn gain ownership (Air NZ model) and we start taking back our future. "they have been reckless, if they want a bailout they must be kiwi owned!"

More likely hes had a word to the banks and said - look, those aussie banks are a mess - sort your self out internally and I wont push for any inquiry. I know you'll need to tighten up lending a lot but i'll be leaving rates low for you for the next couple years as this transition takes place.

Nice move -

Could be, I have heard of late of FHB's being told they need 30% or even 40% deposit minimum to secure a loan.

Trapped Millennial,

I would like to think that your tongue was firmly in your cheek when penning this-but I sense that you were actually serious. I love conspiracy theorists-when you ask for evidence,the response is usually that it has been hidden-thus proving that there really is a conspiracy. Since Orr has only been in the job for a short time,he has presumably inherited the conspiracy from the previous Governor!
I can't wait to see your detailed evidence to support your theory-the 10 likes are just sad,but not surprising.

The gift from central banks that keeps on giving. According to BIS, low interest rates have spawned one-in-six "zombie" firms since the mid-80s. These zombies are businesses, at least 10 years old, not making enough profits to cover debt servicing costs to see record high valuations. Low interest rates allows speculators to bet on such risky ventures with borrowed money often on non-recourse terms.

https://www.reuters.com/article/us-bis-markets-zombie/low-interest-rates...

Hold, Hold, Now!!!!!

https://www.youtube.com/watch?v=iDVuQi4gdtk

Q3 next year rates go up when Governor Orr can no longer 'look through' inflation. below the 2% band range my arse!

Cracks me up, I suppose the extra ACC levies will be 'looked through' as well. Don't worry everyone the constant inflation you are seeing is just lots of 1 offs that happen on a regular basis..

I think I may be getting a bit prickly too, but it does appear that the basket of goods used to measure inflation doesn't contain anything that people actually buy... Unless we are all buying 15 Chinese made televisions every year and dining on plastic rather than food. 2% is a joke. Have they looked at changes in rent, year on year house prices (nationally for the last 10 years (not so much now), petrol in the last 9 months, cheese, veges, meat, power, rates and now ACC levy? You just can't run interest rate policy ignoring the major things that households actually have to spend money on. The inflation calculations are a joke, they just don't factor in the rates at which things are going up and all the while household debt levels are expanding and are now one of the highest in the world.

People who get a good return on their capital/savings will spend when their capital is not being eroded by inflation. They aren't spending at present.

Those that are leveraged up / speculators included are also not spending because the debt servicing is going straight back into the banks coffers and there's little spare capacity for discretionary spend without yet more borrowing.

The rebalancing comes when people start marching in the street because the NZ dollar has collapsed and everything we buy from abroad (net $1,000,000,000 deficit last month) becomes so expensive that rates rise to support the dollar.

At that point we have a braveheart moment where the over-leveraged get slaughtered. UK 1990's type recession on the way with rates rising as the recession takes hold to encourage savers to spend again.

https://www.stats.govt.nz/methods/consumers-price-index-review-2017-revised

Food is ~19% of the total, rent 9%, house purchasing 5% (housing total 25%), transport is 14% (petrol itself is 4%).

TVs presumably are a component of the 0.4% 'audio-visual equipment' total, part of the total 9% recreation and culture group.

As always, these are broad measured based on what the population as an average spends. Many people don't pay rent, many have paid off their mortgages or bought homes years or decades ago and have very low housing costs. For me personally, I spend well under 19% of my income on food, about 25% on housing, and well under 14% on transport, so food and petrol are over-represented compared to my own spending.

I think it was 1998 if I recall correctly where the price of second hand houses was removed from the CPI basket - New builds still in there.

Funny coincidence when you look at NZ house price since 1998....

1999 - removal of residential sections from the basket..

Hi Simon

thanks for looking into that and it is relevant... you can't strip that out of inflation calculations and consider an interest rate policy based on its absence as comprehensive.

Well done

Nic.

Thumbs up for the braveheart link alone!

Central banks and governments do not know how to deal with stagflation because they always believe economic problems are due to lack of demand, all their measures tend to be demand-side policies. Supply-side is never favoured by central planners. Daniel lacalle

there is never a lack of demand.
there is only ever a lack of affordability.

That is literally what demand is in economics, a curve that is price dependent.

yip - in other words its a misnomer
theres more insight in acknowledging it as (weak) affordability ... thats the crux of the problem

Good news

Agreed, I am liking this Governor as he seems a lot more switched on than his predecessor.

Adrian Orr - forever a safe pair of hands, who stands head-and-shoulders above any other financial regulator in the country.

TTP

Yes, I like his style. Very good track record from previous roles too.

Looks like the 'Brains Trust' are all very happy with the maintenance of the cash rate today. But the decision is not a surprise guys, it'll be low until at least the second half of next year.

Yes, this isn't a surprise. Although the recent positive GDP data did make things a bit more interesting.

You say "it'll be low until at least the second half of next year".

Please confirm whether the next move will be up or down. You've predicted that NZ will be in recession by the second quarter of next year, so you'll surely be predicting the next move to be down?

Ahh. I remember that.. I'm sure he said it was going to be increasing - up to 3.5% in 2020, I think.

In that same post he also predicted a completely contradictory/illogical economic position re; labor force.

I wouldn't take any of Nic's monetary forecasts very seriously.

I keenly await Mr Johnson's explanation.

9th September 2018 - Forecast

Growth will turn negative in the first quarter of next year and NZ will be in recession by the end of the second quarter (2 consecutive quarters of negative growth). Australia will be suffering a similar fate and before Q4 of 2019 one of the Australian banks will be trying to tap its government up for funds to shore up its capital ratios (My money is still on Westpac because they've been bleating the most inconsistency over the last 4-5 months, albeit CBA could also pose an issue because of the size of their loan book). Interest rates will be rising by Q4 2019 to hold up a heavily sold NZ dollar. There's a few predictions for everyone that I'm quite happy to have on record. Sound nuts? Maybe, but this old squirrel has seen what happens when a housing market dominates an economy and where banks have leant too much interest only debt and too many high multiple mortgages at the top of the cycle.

Okay let's carry on then. Unemployment will hit 6% by Q2 2020 rising to a peak of 7.4% by Q4 2021. Reserve bank rate will be 2,5% by Q4 2020 and 3.5% by Q4 2021. prices will fall 15-20% at the lower end of the market 25-35% in the middle and 40-50% at the upper/luxury end of the market. The bottom of the market will be 2023/24 a couple of years later than your prediction but ready for your next upswing. In essence a heavy top down correction because of tighter credit from banks and lack of cash from foreigners at the margin, many of whom will be forced to flee with big foreign bank losses.

BLSH, we won't know March quarter GDP until the end of next May. There's a lot already happening in the economy that will stretch households and government budgets a fair deal further between now and then.

So to be clear, you have predicted that by the end of 2019, NZ will be in recession and at the same time RBNZ will be raising the OCR. Do you see the contradictory nature of these two predictions? The RBNZ would not raise interest rates in a recession - I'm sure I don't have to explain to you why.

You're thinking about it from the perspective of someone who is highly leveraged. There are lots who are and their spare capacity to spend and support the economy is waning.

Thankfully there are a lot of savers and individuals who are not leveraged at all, but are holding back on spending because of low rates and inflation eating into their capital. These people tend to be a bit more disciplined than heavy borrowers, but will spend when there is a return on their capital - interest! Which is what the economy is soon going to need to support weakening sales and job losses.

Have a look at the UK recession in the 1990's. Housing market peaked in 87/88. There was then a housing slow down which persisted until 1995 prices falling between 25-40% around the Country. At the same time interest rates rose, very quickly from 91/92 to support the pound and encourage savers to spend. Unemployment continued to rise as rates went up and up.

Just because you've seen one recession since finishing school, don't think that they are all the same. The causes are often very different but do regularly flow back to credit availability and it's tightening. The rebalancing is painful for some and less so for others. Personally I'm really looking forward to the sales.

Nic,

Some elementary reading on Fisher effect is in order.

Thankfully there are a lot of savers and individuals who are not leveraged at all, but are holding back on spending because of low rates and inflation eating into their capital.
Inflation and low interest rates incentivise consumption today. So do you want to rethink this?

Also, read the (new) RBNZ mandate.
Unemployment continued to rise as rates went up and up.
You quote a time where monetary policy was not based on inflation targeting. Nor was one of the key metrics full employment (like our new RBNZ policy).

The most important thing is not to always sound smart, but actually know what you are talking about..

We are at full employment already, there will always be a rate at which full employment is where you have captured everyone who wants to work, we are also very close to peak household debt, the Aussies have gone beyond peak household debt The tools used to stave off the last recession are not available for the next one, which will be different again. There seems to be a blind belief that interest rates will keep going down - where do they go to? and at some stage you create capital flight, if the returns don't look worth while against the returns from other nations and markets. I think that a few may be forgetting that the Reserve bank is just a minnow compared to the forces of the major economies it is pretty powerless when they start shifting the levers for their own ends.

Nic,

Aussies have gone beyond peak household debt
How do you go past the "peak" of something?
Did this not sound weird to you when you were writing it?

There is no blind belief that interest rates are going to decrease. The thing we are objecting to is your blatant misunderstanding of the adjustment mechanism in the monetary system..

Peak household debt is when debt servicing costs break the real economy. The waterfall has just started over there and will hit the real economy probably a quarter before us. Rates and unemployment in Australia are both going up and credit growth is being restricted. Nice FT article that I posted lower down for BLSH's education.

LOL, "I climbed to the peak of Mount Everest, and then I kept climbing"... Do you mean you started flying?

He still tried to deflect with another Depaak Chopra argument....

"When I say peak household debt I mean waterfalls and grasshoppers eating cake at the lake"...

He's the the love child Dr Seuss and Depaak Chopra.

Nic, this just keeps on getting more bizarre.

First you've predicted that by the end of 2019 NZ will be in recession, while at the same time RBNZ will be increasing interest rates. Increasing interest rates puts the breaks on the economy, so this simply wouldn't happen.

And as if this wasn't enough, now you've said "...interest rates rose, very quickly from 91/92 to support the pound and encourage savers to spend." This is factually incorrect - Increasing interest rates discourages spending (because it is more expensive to borrow) and encourages saving (as savings earn a higher rate of return sitting in the bank).

I actually thought better of you Nic. This is high school economics.

I knew he was a Deepak Chopra as soon as he opened his mouth. He has only one dream in his small brain and that is the world and NZ's economy will crash so he can feast on the corpses. For this to happen he needs:
1. Unemployment around 25%;
2. Fall in house prices of 70%;
3. All the banks have gone under and there is no more debt in the world;
4. OCR is at 45%;
5. GDP at -50%
6. Zombies walk the earth and Rick Grimes is his best friend.

He has amassed quite a following of fan boys, but then this site is full of envious sadists who wish nothing more than to take pleasure in the demise of others.

Haha, good old Deepak - the master of woo-woo.

Nic has almost as many fan boys as Deepak. People love to be told what they want to hear - regardless of whether the big words that have been stringed together actually make sense.

"strung"

heavy G
Just trying to help provide a bit of balance to the brainwashing old boy. It appears that I have struck a nerve though with all these personal attacks.

BLSH
It's factually correct. The pound was depreciating so fast and inflation rising so fast that there was no choice but to raise rates. Where are Aussie rates headed at the moment? Up. What's happening with the Aussie unemployment rate? It's also heading up and will go higher - see the FT article below. High school economics, that made me smile.

https://www.ft.com/content/093cbd0e-2d69-11e8-9b4b-bc4b9f08f381

But Nic, I didn't say you were incorrect about the Cash Rate's influence on the value of the pound.

You were factually incorrect to say that interest rates are increased in order to "encourage savers to spend". The opposite is true. Interest rate rises have the effect of slowing the economy. It discourages spending as it becomes more expensive to borrow, and encourages saving as deposits give a better rate of return.

"...interest rates rose, very quickly from 91/92 to support the pound and encourage savers to spend. Unemployment continued to rise as rates went up and up."

"brakes"

Haha, glad to see you are hanging on my every word.

Speaking as an economics major, I can tell you that a lot of the core economic theories taught at Uni and high school are rubbish. Efficient market hypothesis and the quantity theory of money are examples of theories that don’t hold up in the real world, so if you choose to believe in them then that’s fine. People believe all manner of crazy things these days. Your assertion that “increasing interest rates discourages spending” does not always hold true, as a cursory study of economic history will show. A primary driver of spending is confidence and not interest rates. People borrowed money at 20% interest rates and invested/spent in the 80s, whereas most people don’t want to borrow money in parts of Europe at 2% interest rates. Your argument would dictate the opposite occurring.
As for the reserve bank increasing rates in a recession, why would that be a surprise? That has happened in the US and Europe during recessionary periods many times, as well as a few other places like Argentina, etc. Thinking it can never happen here is a bit naive.

Ludwig - You do realise that you're going against BLSH's vast experience of being at uni in little ole NZ when the GFC took place.

Guttentag Ludwig

Yes, I do choose to adopt conventional economic theory taught in university, and on which there is essentially universal consensus amongst economists.

You need economicshelp.com

https://www.economicshelp.org/macroeconomics/monetary-policy/effect-rais...

Regarding that major, you deserve a refund.

"Guten Tag".

This one was a swing in the dark. I was going to google check, but then I remembered I have my loyal spellcheckers for that.

Haha, I couldn't resist dropping down to custards level.

*custard's

I think Warren Buffett's comment about efficient market theory sums it up:

“Naturally the disservice done students and gullible investment professionals who have swallowed Efficient Market Hypothesis has been an extraordinary service to us. In any sort of a contest – financial, mental or physical – it’s an enormous advantage to have opponents who have been taught that it’s useless to even try” Warren Buffett

Conventional economic theory does provide a very good indicator for what RBNZ and the banks will be doing with rates. Don’t you find this helps forecast ahead when deciding whether to fix or float your mortgage? Oh wait, that’s right...

Nzdan, there is an easter egg in there for you.

NC,

I worked in the financial market in the UK and remember 91/92 very well. I remember "Black Wednesday" in Sept 92,when the Chancellor-Norman Lamont-first raised interest rares twice to try and prevent the UK from leaving the ERM and then had to climb down. The stockmarket took off like a rocket-i was in St Andrews playing golf that day-and inflation and interest rates kept falling.
I thought you were knowledgeable,but apparently not.

Banks may be forced to start raising rates out of cycle just like what has happened in Australia.

He said the Reserve Bank would increase rates. You think RBNZ would increase rates during a recession? This is quite different to the likes of ASB and ANZ raising rates out of cycle.

How do you calculate the 7.4% unemployment peak?

And he doubles down. Would you expect anything else;)

"Reasoning will never make a Man correct an ill Opinion, which by Reasoning he never acquired" (Jonathan Swift)

Hi nymad,

Agree with you on that.

As good as Nic Johnson thinks he is on monetary matters, he's completely outclassed by the likes of Adrian Orr, Grant Spencer, Graeme Wheeler and Alan Bollard.

TTP

Indeed

Righto, I'm off on holiday now. Somebody message me if any more bad news we didn't already know about comes to light from the milkmen.

The consistently weak NZ dollar must have been high up on his mind...

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Ask any retailer and they will tell you the economy is in bad shape. Rates, insurance, petrol and food increases are biting. Emergency interest rates for some time yet. Great news for those who have borrowed money.

Ask any retailer and they will tell you the economy is in bad shape. Rates, insurance, petrol and food increases are biting. Emergency interest rates for some time yet. Great news for those who have borrowed money

I agree, but "great news for those who have borrowed money" I'm not so sure. If the consumer economy goes into its own recession, this is negative for asset prices, valuations, consumer spending, jobs, and income growth. If the debt growth engine can operate independently from consumption without any feedback loops, you're possibly correct.

Promote policies to inflate incomes and the prices of goods and services at near equal rates. With concurrent policies to suppress house prices and rents. Disposable incomes remain relatively constant leaving no surplus funds to pump the housing/rent market. But the share of income being devoted to rent or mortgage debt decreases over time to historical averages. Sounds easy.

If USD funding rates rise - then banks will probably have to push rates higher - doing the RB's job for them.

Could be hard for RBNZ to raise rate if economy is in a downtrend at that stage - which appears to be consistent with B.confidence, commodity P and T.Wars.

So if Orr is going to encourage the NZ dollar to devalue, what's the best / cheapest way to allocate some cash into different currencies? Good foreign shares, or local accounts in different currencies? Other?

All valid options. I've got some cash sitting in my US sharebroker account doing nothing which i intend to add too, some left over US currency in a drawer at home, and some AUD in a foreign currency account with the bank.

If you are worried about OBR ever kicking in, then foreign currency accounts at a NZ bank are just as at risk as normal deposits as far as I know. Hard currency in a safety deposit box should be safe.

Cheers. Do you use one of the bank's trading platforms or the likes of Halifax?

I use ASB for NZX and ASX, and Tradestation for US markets.

Great news

The Central Bank is looking at raising its interest rates, while our RBNZ is on holding pattern. Watch out for the NZD vs USD exchange rate! I guess price of petrol and other imported goods will be heading up and dragging the inflation long the way.

The thing I find the most concerning. Is that 10 years ago they struggled to blindly guess forecast out more than the next review.

Now they seem to be able to predict years in advance with relative certainty.

Chieftan Orr has special powers though, he calls on the earth and the sky and it guides the ship to calmer waters. Don't mistake forward guidance as forecasting.. Sometimes 'inertia' is a very sensible move when to go one way or another could get you lost in fog and falling into a ditch. He wants a weaker dollar but has no room to lower rates any further without collapsing it so talk of low for longer is the only policy he has at present.

When everything becomes too big to fail the central banks have failed their financial stability mandate.

Why are there no accountability consequences?

Vested interests have no accountability by design.

If things shift quickly overseas the banks will raise the rates regardless of the OCR. The OCR is nothing but a speed limit sign, you can choose to ignore it.

With our banks being owned overseas, (first by the Oz banks, then ultimately by whoever owns shares in the Oz banks , which is mostly US institutional investors I believe), don't the falling exchange rates water down their dividend income, creating pressure to raise interest rate margins? How long will they resist this pressure?

Good to hear, just signed loan documents today to buy a $1M warehouse (disclaimer $1M doesn't buy what it used to, if you looked at it you might think $500k if you're lucky).
But there is absolutely nothing for sale located near Auckland Airport and I would much rather buy than pay rent any day.

Good for you. many businesses do not buy their premises because:
1) they cannot afford the expense on top of funding their startup business
2) they think they can get better ROI in their business than by owning the RE
3) they prefer to stick with what they know (their own business) than something new (commercial RE which does require the owner to be much more savvy than residential RE)

I am sure Mr Orr brings some very good credentials and experience to the table.

And a look back at his recent performance would attest to that – apart from a small blip – thank you Portugal.

However, there was a time when a nation, if not the world, fawned over Mr Greenspan.

But subsequent events and history now view him in a different light.

Ignorant at the wheel – “I didn’t know”.

Nic is basically paraphrasing from Ray Dalios new book about the long term debt cycle. Who's going to argue with Ray? While what Nic predicts may not happen it's basically the template from 48 similar debt cycles that Ray studied and certainly has a lot of merit.

There are a lot of people on Interest.co who are more intelligent, financially savvy and successful than Ray Dalios will ever be so I'll take their point of view over his any day.

Darn Tooting! Google can't even tell me who Ray Dalios is.

Who is Nic?

An enigma, wrapped in a puzzle and surrounded by mystery.

https://www.youtube.com/watch?v=9ckv6-yhnIY

Pragmatist. I'd never heard of Ray Dalios either until a day or so ago. Apparently he's worth a read

Just need to press enter after typing in his name.

I did, but google just kept spitting back Ray Dalio, a billionaire hedge fund manager, no sign of Ray Dalios, and I want the real deal.

stop it or i'll wet the bed.

3.99% fixed rate 12 months by Xmas.

Recently refinanced and managed to get the 3.99% on offer from Kiwibank. Suggested to current bank that we were keen to hang around if they could match it, but nothing. So, switcharoo we go.

ANZ matched Kiwibank's 3.99% for me this month after originally offering 4.15%