HomeBlogHome Loan Market UpdateReserve Bank OCR Slashed to 4.75%: Economic Impact and What It Means for NZ Homeowners

Reserve Bank OCR Slashed to 4.75%: Economic Impact and What It Means for NZ Homeowners

In a significant move that’s set to impact the New Zealand property market and broader economy, the Reserve Bank has cut the Official Cash Rate (OCR) by 50 basis points to 4.75%. This decision, announced on October 9, 2024, marks the second consecutive rate cut and signals a shift in the economic landscape that could benefit homeowners, potential buyers, and businesses alike.

Key Points from the OCR Announcement

The Reserve Bank’s Monetary Policy Committee cited several factors influencing their decision:

  • Economic activity in New Zealand remains subdued, partly due to previous restrictive monetary policy.
  • Business investment and consumer spending have been weak.
  • Employment conditions continue to soften.
  • Annual consumer price inflation is now within the 1% to 3% target range and converging on the 2% midpoint.

Finance Minister Nicola Willis hailed the decision as “fantastic news,” stating, “Double whammy, double happy.” She emphasized that this move indicates inflation is coming under control, which is crucial for addressing the cost-of-living crisis.

Economic Impact: How Soon Will We See Changes?

While the OCR cut is welcome news, it’s important to understand that its effects on the broader economy may take some time to materialize. According to a recent RNZ article:

  • Gareth Kiernan from Infometrics suggests it typically takes about nine months for interest rate cuts to have a real impact on economic activity.
  • The labour market may continue to deteriorate in the short term, affecting household confidence and spending decisions.
  • However, Alan McDonald, head of advocacy at the Employers and Manufacturers Association, believes the cut is “more about the signal than the quantum,” potentially boosting sentiment immediately.

Brad Olsen, principal economist at Infometrics, noted that the Reserve Bank “seemed to have realised” that the economy was weaker and quicker cuts were needed to normalise interest rates. He added, “A clear, if only implied, admission that the Reserve Bank may have been too slow to act.”

Sector-Specific Impacts

Different sectors of the economy may experience the effects of the Reserve bank OCR cut at varying speeds:

  1. Retail: Carolyn Young, Retail NZ chief executive, is optimistic about the potential effect on the retail sector, especially with the holiday season approaching. “Strong pre-Christmas sales are critical to retailers meeting their annual sales targets,” she said.
  2. Shopping Centers: Lauri Solecki, Dress Smart Auckland centre manager, reported a “significant surge in foot traffic, of almost double-digit growth” after the first rate cut this year, indicating that consumer confidence can have an immediate impact on some businesses.
  3. Business Borrowing: The cut is expected to ease pressure on the cost of borrowing for businesses of all sizes, which could encourage some “on the edge” to persevere through challenging times.

What This Means for Homeowners and Buyers

The OCR cut is expected to have several positive impacts on the property market:

  1. Lower Mortgage Rates: Banks are likely to pass on the rate cut to customers. As Finance Minister Willis noted, “Around half of mortgage borrowing is now fixed or floating for six months or less.” This means many homeowners will have the opportunity to switch to lower interest rates in the coming months.
  2. Increased Buyer Activity: Campbell Dunoon, LJ Hooker group head of Network NZ, observed increased buyer confidence and auction participation following recent rate cuts.
  3. Stable Property Prices: Despite increased buyer interest, property prices remain relatively stable, with the median house price down by just 0.5 percent in September compared to a year ago, according to CoreLogic data.
  4. Opportunities for First-Home Buyers: The combination of stable prices and lower interest rates creates better opportunities for first-home buyers looking to enter the market.

Looking Ahead

Economists suggest that another large cut might happen in November, with Infometrics economists even speculating about a potential 75 basis point cut. However, the full economic impact of these cuts may not be felt until mid-2025.

What Should You Do Now?

If you’re a homeowner, prospective buyer, or business owner, now is an excellent time to review your financial situation and consider your options:

  1. If you’re on a floating rate mortgage, you may see immediate benefits from this rate cut.
  2. If you have a fixed-rate mortgage coming up for renewal, start exploring your refinancing options.
  3. First-home buyers should reassess their borrowing capacity in light of these lower rates.
  4. Business owners might want to review their borrowing strategies and investment plans.

At Fundmaster, we’re here to help you navigate these changes in the financial landscape. Our expert team can provide personalized advice on how to make the most of this OCR cut, whether you’re looking to buy your first home, refinance your existing mortgage, or optimize your business finances.

Contact Fundmaster today to discuss how we can help you take advantage of these new market conditions and secure your financial future.

References

  1. Dann, L. (2024, October 9). Official Cash Rate decision live updates: Reserve Bank OCR cuts rate by 50 basis points to 4.75%. New Zealand Herald. https://www.nzherald.co.nz/business/official-cash-rate-decision-live-updates-reserve-bank-to-make-2pm-ocr-announcement-will-it-be-25-or-50-basis-points/XIVHS3UQTFFSZISYV636DGPEZQ/
  2. Edmunds, S. (2024, October 10). How soon will OCR cut lift economic gloom? Radio New Zealand. https://www.rnz.co.nz/news/business/530320/how-soon-will-ocr-cut-lift-economic-gloom

I've dedicated my career to helping Kiwis achieve their dream of homeownership. As the founder & CEO of Fundmaster, my mission is to transform the mortgage industry and make buying a home more accessible for everyone.