Markets picking big rate cut

Wholesale money markets are picking Reserve Bank governor Alan Bollard will drop the official cash rate by 75-100 basis points in his March 12 announcement.

That would take the OCR to 2.5-2.75% and put further downward pressure on mortgage rates.

ANZ National Bank chief economist Cameron Bagrie said: "As of yesterday [Wednesday], the market was divided between either a 75 or 100 basis points cut and a terminal rate of 2.25%."

Bagrie was picking the OCR to bottom at 2.5%, but he said it could go lower.

BNZ chief economist Tony Alexander said, "My latest understanding is everybody's expectation is there's going to be a cut and that the markets are looking at 75 basis points, possibly 100."

But, said ASB chief economist Nick Tuffley, the markets were not perfect predictors of OCR movements. "In January the market was pretty sure it was going to be a 100 basis points cut. We got 150 basis points."

According to some bank economists, neither the markets, nor the public, appreciate the speed of deterioration. "We think we are going to end up at 2%. The markets think we will end up at 2.5%."

Alexander says he thinks the pace of deterioration of economic fundamentals is so fast, it justifies BNZ's extra caution, but he does not expect the 150 basis point cut in the OCR to come all in one go.

There is a limit to how far the OCR can fall, Bagrie said, as New Zealand is so dependent on foreign funding that it has to keep a yield advantage over other nations to attract money from lending institutions in places like Japan.

But Bagrie said once there are no OCR drops left in Bollard's bag of tricks, the governor will seek to influence the money markets by signalling how long he expects to keep the OCR low.

"At some stage he's going to have to play the other card and tell people that rates are going to be here for a while."

That would lead to the last plunge in mortgage rates, Bagrie said, and provide a signal that it is time for borrowers to fix their home loans.

Both his and Alexander's advice to borrowers would be to wait until banks were offering five-year rates "which start with a 5", and then fix for the long term.

That would be a change of psyche for borrowers, but investors would be able to lock in certainty and a good rate, Bagrie said.

Alexander said: "I'm of the view that a person is going to be able to pick up a fixed-rate loan at below 6%."

Five-year rates at the banks currently range from 6.49% to 6.6%.

But he said "I'll believe it when I see it," of the idea Kiwi borrowers would embrace longer fixed-rate loans in favour of the two-year loans that have in recent years been the most commonly taken out.

Alexander said floating rate home loans could see another one percentage point shaved off them before they had reached their bottom.

Floating rate home loans start at 5.99% at Kiwibank and range up to 6.95% at ANZ and National Bank. Two-year fixed rate loans start at 5.88% at TSB and range up to 5.99% at Kiwibank.

- © Fairfax NZ News