OCR cut likely, but will banks pass it on?
A cut to the official cash rate is on the cards next week, but economists and mortgage advisors have warned that you should not count on seeing the banks pass all of that cut to borrowers.
Economists are predicting the OCR will be cut to 1.75 percent in a week's time, despite yesterday's strong job numbers.
The unemployment rate has fallen to 4.9 percent, the first time it has been below 5 percent since December 2008. The participation rate climbed to a record 70.1 percent.
Yet wage inflation remained subdued, with an unchanged 0.4 percent increase between July and September.
Weak inflation is a major reason for why economists think the Reserve Bank (RBNZ) will cut rates next week.
Another factor is the strong dollar. It is stronger than the Reserve Bank would like, and it gained ground following the release of the job numbers.
The New Zealand dollar was trading at 73 US cents at 7am today, up 1.5 percent in 24 hours. It was sitting at 95 Australian cents and 59 British pence.
You could look at the job numbers and argue the RBNZ could afford to hold steady next week. But economists at ANZ, ASB, BNZ and Westpac all think it is likely the OCR will be cut.
That is because the RBNZ has strongly signalled a cut is likely, the dollar could spike even further if there is no cut and the reality is that the banks are not likely to pass on the full cut anyway.
Mortgage advisor David Windler predicts there will be little movement on rates even if the OCR is cut to 1.75 percent.
He told Newshub the competition for deposits means the banks are having to be a bit more generous to savers.
At the same time he says the banks are having to pay more to borrow money offshore.
"The banks are likely to pass on little or no rate cuts as competition for deposits sees deposit rates edging higher and credit spreads rising as liquidity remains tight."
He points out there is the potential for the US Federal Reserve to hike rates next month, while other central banks are coming to the end of the road for their rate cuts.
The Fed held steady today, but signalled that it is likely to hike its key lending rate from 0.5 percent at its December meeting.
Mr Windler's view is echoed by economists. In an economic update released late last week, ASB singled out several factors that could mean rates do not fall much, if at all.
They say a 1.75 percent OCR has been factored into the rates the banks charge each other to borrow money in the wholesale markets.
Longer term rates are rising as well, led by increases in offshore rates.
The "risk premiums' the banks pay to obtain wholesale funding in international markets have increased due to "wobbles in the European banking system and regulatory changes in the US managed funds industry".
ASB says the growth in bank deposits in New Zealand has also slowed.
"That leaves banks with a need to obtain an ever-greater amount of alternative funding, mainly from those relatively expensive wholesale funding sources. In that environment, banks will also be keen to hang onto their retail deposits, restraining the ability for deposit rates to follow the OCR lower."
Mr Windler says there is a possibility some mortgage rates might even go up, if the banks' international borrowing costs rise.
A wildcard would be the potential election of Donald Trump. A report issued by the New Zealand Institute of Economic Research (NZIER) today says that if he won the presidency, that could lead to higher mortgage rates.
NZIER deputy chief executive John Ballingall predicts a Trump presidency would be "horrible" for the New Zealand economy, impacting both businesses and households.
He says borrowing costs for New Zealand firms and mortgage-holders would be likely to rise as credit conditions tighten in the face of the political uncertainty created by a Trump presidency.