The biggest conversation in the market right now is around the OCR. Will it keep going down? Is it because of low business confidence? Will mortgage rates keep going down?
We started 2019 with the OCR at 1.75% and in ten months it's already sitting at 1%, with a prediction that we could see it at 0.75% by the end of the year.
It is a vast fall within a space of a year and going below 1% will be unknown territory for us. However, it doesn't look like we are alone.
Early this week, across the ditch, the Reserve Bank of Australia (RBA) dropped their official cash rate by 0.25%, taking them down for the first time to 0.75%.
Like us, it looks like the RBA is looking to cut interest rates to stimulate activity in the economy. According to a recent article in The Australian Financial Review (AFR), it seems that they have identified that their biggest challenge is the fall in housing construction activity. In some areas, new builds are going up quickly, but it seems that new building approval numbers appear to be getting worse.
Without more houses going up there's likely to be fewer transactions and less activity in the housing market down the track. If developers aren't building new homes, then it's expected that the unemployment level will increase.
Once again, according to the AFR article, they are skeptical about the OCR helping. In Australia, interest rates have stimulated mainly through increased house prices which have led to the needs for more construction activity. The AFR argues that decreasing the OCR makes things cheaper, as banks are simply unable to lower their funding costs enough to pass on all the rate cuts. Some of those with debt are finding themselves with negative equity, which means they will be more inclined to pay it down than spend, while those with assets may be wary of spending their capital given the low rates of return.
With the Reserve Bank of New Zealand likely to do the same before the end of the year by bringing the OCR to 0.75%, it will be interesting to see what the Australian banks are going to do next. As their banks own the majority of the big banks here in NZ, an interest cut over the ditch may mean that banks will have enough margin to cut rates over here too.
