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OCR cut will provide new focus

Financial markets and commentators expect to see a further cut in the official cash rate of interest next week. The Reserve Bank is due to announce its latest decision on the rate on Thursday 11 September.

by Maria Scott

This will provide a new focus for activity in the mortgage market, which has remained quiet over the past week. The Reserve Bank announced its first cut in the OCR for five years on 24 July and there is a market consensus that there will be another reduction next week of 25 basis points to 7.75%.

Westpac economists say in their latest economic commentary that a no-change decision by the Reserve Bank could become a de facto tightening in monetary conditions.

The Reserve Bank will issue a full monetary policy statement next week accompanied by a press briefing. The information provided by the central bank and Governor Alan Bollard will determine how lenders react to the interest rate cut; whether the signals justify an aggressive response with mortgage rates or a muted reaction.

There have been suggestions that lenders would not take mortgage rates down on the same gradient as the OCR over coming months because of wider concerns about the cost of credit internationally and pressures to rebuild battered margins.

At present, two-year fixed rates are the lowest overall and the lowest two-year rate according to the rates posted to the Good Returns mortgage table is 8.84% from TSB Bank. The lowest one-year rate is 9.05% from Kiwibank and the lowest six-month rate is also from Kiwibank at 9.6%.

Changes in the OCR tend to influence these shorter-term rates more heavily than the cost of long term mortgage finance so if next week's announcement is to have an impact, it will be on the shorter-term fixes.

Budget-sensitive borrowers will be drawn to the cheapest rates in the market which, as noted, are for two-year money. But it could soon be an even more attractive option to commit for shorter periods.

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