Well, that was a surprise. While the general consensus was that the Reserve Bank would cut the Official Cash Rate (OCR) on August 7, it was thought we would see a 25-basis point (0.25%) reduction rather than the 50-basis point drop which eventuated.

I’ve heard many investors saying we may see an interest rate starting with a two shortly. Whilst as a borrower it sounds exciting, I will be surprised if it happens (but I would have called commentators crazy a few years back if they said we’d see interest rates starting with a three). What needs to be in the back of the mind is the savers on the other side of the equation, many of whom are reliant on an income stream from these deposits to live. There will be a floor to how far banks can drop their term deposit rates before they start noticing withdrawals as retirees look for better returns.

On top of that there is the core funding ratio, which means that unlike prior to the global financial crisis, New Zealand banks can’t just raise more funds offshore. There is now a much higher reliance on these local deposits.

Our floating rates used to be almost completely indexed to the OCR but in recent years there has been a larger and larger degree of separation. This is also likely to continue with the increased likelihood we will see the Reserve Bank increase the amount of capital the banks need to hold, which many commentators expect to be an influence which could put upward pressure on mortgage rates.

Also interesting was the commentary from the Reserve Bank Governor Adrian Orr stating that: “It’s easily within the realms of possibility that we might have to use negative interest rates.” Note that this comes as one of the largest banks in Denmark, Jyske Bank, has recently released a 10-year mortgage at a -0.5% rate, where borrowers pay back less than they borrowed. A positive is that the reduction will give banks more of a reason to look to reduce their debt servicing rates, which in a number of cases are now double the interest rate which the funds are actually being borrowed at. This has already eventuated in Australia where these test rates are regulated, although in New Zealand I do wonder if our banks have kept the test rates high as an attempt to continue to push off the Reserve Bank’s continual attempts to get their hands on a debt-to-income tool.

While we are in a tight credit market there is still strong price competition especially for quality borrowers and we are seeing rates priced well under what is shown in the table on this page. If you have rates coming up, use it as a time to have a look around. Spring has been when banks have competed hardest on pricing.