Update on Interest rates

The RBNZ surprised us when they dropped the OCR by 0.5% last week.

While the team at Property Guide thought that the rates should have been kept on hold ( still didn’t think it was necessary at this point in time to lower the OCR), others thought the rate would be dropped by 0.25%. Few predicted the RBNZ would drop it by 0.5% . Really we thought the only times the OCR has been cut by 50bps or more have been in response to a crisis: after the 9/11 terrorist attack, during the GFC, and after the Christchurch earthquake.

So by cutting the OCR by 0.5% the RBNZ are indirectly telling us that  we are already experiencing some sort of financial crisis (trade war perhaps?). Either that or the RBNZ expects NZ to experience a crisis in the near future. That is why the RBNZ are taking proactive action to lower the OCR to continue supporting employment and growth. If the RBNZ is right in their analysis, then the statistics and government are lying to us when they keep telling us the economy is doing well (look at GDP, look at employment statistics, look at some other pointless statistic).

Whatever the case, the NZ dollar got hammered when the RBNZ lowered the OCR and this can only be bad news for importers and NZérs planning to travel overseas. The cost of imports are likely to rise (think oil prices) and this will translate into higher prices at the supermarket, the Warehouse and at the pump. On top of that, we still have to contend with the fuel tax too. No wonder people are struggling to make ends meet. Exporters benefit when the NZD depreciates but even then they are struggling: Fonterra just reported a big loss due to impaired assets.

The only good news for those with mortgage is that the rates dropped too. ANZ, BNZ and Westpac are offering 3.69%

On the topic of interest rates: Can the OCR go into negative? What would that mean? It would mean savers would be charged interest for having money in the bank accounts. In fact, the Swiss bank UBS told its rich clients last week that it would charge 0.6 per cent a year on deposits of more than €500,000 ($865,000). If that happened to NZ, that would be adding insult to injury to the few people who do save money. NZ as a country already have a poor track record of saving. To punish the few people who do have savings would exacerbate the savings problem in NZ.

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