Talk Money with Tony Field – July 23, 2015

The expectation is that the OCR will fall to 2.5 percent by the end of the year (file)
The expectation is that the OCR will fall to 2.5 percent by the end of the year (file)

Some of the banks have wasted no time in cutting their floating mortgage rates, following today's decision by the Reserve Bank to cut the official cash rate (OCR).

The RBNZ lowered the OCR by 0.25 percent to 3 percent. That had been widely predicted because of falling dairy prices, the slowing Christchurch rebuild and a recent drop in both business and consumer confidence. The RBNZ has room to move because inflation is below its target range of between 1 and 3 percent.

RBNZ said: "A reduction in the OCR is warranted by the softening in the economic outlook and low inflation. At this point, some further easing seems likely."

It also said that although the New Zealand dollar has declined significantly since April, "further depreciation is necessary given the weakness in export commodity prices".

The RBNZ's decision was released at 9am, and two minutes later Kiwibank announced it was lowering its floating rates from 6.4 percent to 6.15 percent. The reduction is immediate for new customers and takes effect in two weeks for existing customers.

ANZ also announced it will lower interest rates by 0.25 percent per annum to 6.24 percent for its floating rate and 6.35 percent for its flexible home loans.

The new rates will take effect for new customers from Monday July 27 and for existing customers from August 10.

ASB chief economist Nick Tuffley says: "We continue to expect the RBNZ to cut the OCR by 25 basis points apiece in September and October, to a low of 2.5 percent. That, along with the weakening New Zealand dollar, will help prop up the broader economy and push inflation back towards the 2 percent mid-point of the inflation target.

"The market may make a lot of the changed comments around the New Zealand dollar, but the key message from the RBNZ is it wants to see the New Zealand dollar lower."

Westpac chief economist Dominick Stephens is sticking with his prediction the OCR will be at 2 percent by the end of the year. He says: "We remain comfortable calling a 2 percent low-point in the OCR, with the odds favouring a 50bps reduction at some point, most likely September."

Here is a transcript of the statement by Reserve Bank Governor Graeme Wheeler.

The Reserve Bank today reduced the official cash rate (OCR) by 25 basis points to 3 percent.

Global economic growth remains moderate, with only a gradual pickup in activity forecast. Recent developments in China and Europe led to heightened uncertainty and increased financial market volatility. Particular uncertainty remains around the impact of the expected tightening in US monetary policy.

New Zealand's economy is currently growing at an annual rate of around 2.5 percent, supported by low interest rates, construction activity, and high net immigration. However, the growth outlook is now softer than at the time of the June Statement. Rebuild activity in Canterbury appears to have peaked, and the world price for New Zealand's dairy exports has fallen sharply.

Headline inflation is currently below the Bank's 1 to 3 percent target range, due largely to previous strength in the New Zealand dollar and a large decline in world oil prices. Annual CPI inflation is expected to be close to the midpoint of the range in early 2016, due to recent exchange rate depreciation and as the decline in oil prices drops out of the annual figure. A key uncertainty is how quickly the exchange rate pass-through will occur.

House prices in Auckland continue to increase rapidly, but, outside Auckland, house price inflation generally remains low. Increased building activity is underway in the Auckland region, but it will take some time for the imbalances in the housing market to be corrected.

The New Zealand dollar has declined significantly since April and, along with lower interest rates, has led to an easing in monetary conditions. While the currency depreciation will provide support to the export and import competing sectors, further depreciation is necessary given the weakness in export commodity prices.

A reduction in the OCR is warranted by the softening in the economic outlook and low inflation. At this point, some further easing seems likely.

The expectation is that the OCR will fall to 2.5 percent by the end of the year. Westpac economists have predicted that the OCR could be as low as 2 percent by the end of the year.

That will help to lower fixed mortgage rates.

But falling rates are not good news for people who rely on the interest generated by savings accounts or term deposits. That includes many retirees who rely on term deposits to supplement their pension.

New Zealanders have around $140 billion in term deposits and savings accounts. The term deposit rates vary from as low as 2 percent for some one-month deposits to just over 4.5 percent from some five year terms.

But it can depend on the size of the deposit.

Banks are willing to do some deals, but again it depends on the size of the sum the customer wants to invest.

The currency markets had fully priced in a cut of 0.25 basis points.

The kiwi was trading at 65.68 US cents at 9.30am. That compared to 65.84 around 6am, and 66.15 at 6:30pm last night.

It was 89.24 Australian cents. That compared to 89.33 at 6am and 89.07 at 6:30pm last night.

It was 42.17 at 9:30am, a fraction down from 42.23 at 6am and 42.35 pence at 6am.

The kiwi was 60.24 euro at 9:30am. That was almost unchanged from 60.39 euro at 6am and 60.36 at 6:30pm last night.

The weak dairy prices were a factor in the RBNZ's thinking.

Yesterday economists at BNZ lowered their forecast for Fonterra's payout to farmers. They are forecasting a payout of $3.80 per kilogram of milk solids, down from their previous forecast of $4.30.

That compares to Fonterra's own forecast of $5.25.The Fonterra board is due to review the payout on August 7.

BNZ says: "International dairy prices have been under severe downward pressure over recent months as ongoing supply expansion, soft demand and trade embargoes weigh. Near-term indicators are poor."

BNZ's forecast is based on the assumption that dairy prices will start to recover later in the year from the current US$1848 per metric tonne.

If international prices don't start to recover, BNZ says the forecast could be between $3.00 - $3.50.

If the global prices were to fall to US$1,500 in the near-term and there was no recovery over the season, the payout could be $2.40 to $2.80.

A rise in whole milk prices to US$3500 would see the payout lift to between $4.50 to $5.00.

BNZ says: "While this scenario may seem unlikely given current weak conditions, we note that in the three dairy price cycles within the past 10 years whole milk prices have essentially doubled within a 12-month period. Is it darkest before the dawn at present?

"These scenarios are neither intended to scaremonger nor elevate expectations. They are simply designed to illustrate the degree of uncertainty at present and highlight the very wide range of possible outcomes that that generates. From a business risk and planning point of view, it bears thinking about. Whatever the outcome eventually turns out to be, one thing is for sure - the extreme volatility and uncertainty is wholly unhelpful."

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