For many it came as quite a surprise that the OCR was dropped by another 0.25% on Thursday morning last week.
The Reserve Bank had projected a further 0.5% cut at the beginning of the year and now, based on factors such as the slowing global economy and pressures on dairy prices it was a appropriate to drop 0.25% last week.
They also indicated that they expected the 0.25% to be passed on by the retail banks to consumers. It’s interesting to note that this hasn't eventuated.
So far ANZ, the country’s largest lender, has cut their floating rate by 0.10%, ASB and Sovereign dropped by 0.20% and one of the minnows Co-operative have dropped by the full 0.25%. No changes to fixed rates at this stage.
The feedback from the banks is that there will be little change to the fixed rates as the markets have already priced in the expected OCR changes. They argue that in fact the cost of borrowing money from overseas has increased due to increased pressures from economic downturn globally.
This is a tough argument to buy-in to when there is very little clarity or visibility on margins, and the fact that lending funds come from different sources including, deposit funds and overseas funding.
It’s also interesting to note that interest margins are a major source of where the banks record and increasing profits continue to come from. With one bank CEO publicly announcing that they would like their bank to be the first in NZ to surpass the $1bn profit mark. It could be argued that not passing on the discounts and not having visibility around the margins is very much a case of unnecessary profiteering!
Undoubtedly the question we are most commonly asked, is; Where do we see the rates going? This is still very much a case of crystal ball gazing and the most appropriate answer is that you have to choose the structure and rates that best meet your needs and goals and objectives for the short, medium and long term.
Ali Toumadj is the Founder and Director of Prosper Group and has 20 plus years of financial experience and customer service under his belt. Learn more about Ali here.