Analysis: What the OCR cut might mean for mortgage and term deposit rates.

The 50 basis point cut in the Official Cash Rate to 2.5% may not be passed on to all mortgage and term deposits in the same way it has been in the past. It all depends on how the wholesale markets react to the Reserve Bank Governor Alan Bollard’s comments about future interest rates

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He said in his statement that he expected the OCR to stay at or below its current levels until the latter part of 2010. This is a very strong signal that rates will remain low for at least a year and a half and he will be hoping that longer term wholesale interest rates fall because of that certainty.

The 50 basis point cut was widely expected so it is the comments about the future that could move rates.

Floating and 6 month mortgage rates are more likely to fall, possibly around 20-30 basis points over the next week. Longer term fixed rate mortgages may be held or fall only slightly given the intense funding cost pressure faced by the banks because of their NZ$100 billion of foreign debt.  However, if longer term wholesale rates fall dramatically then some of that could be passed on.

However, term deposit rates are unlikely to fall much or at all. There is intense competition between the banks for domestic savings because foreign savings are hard to get and expensive. This is another factor influencing how much the banks will be able to cut their mortgage rates.

For further analysis, see here.

This is article is kindly reproduced courtesy of Interest.co.nz

Posted: 1 May 2009

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