Relief for 100,000 households

About 100,000 households with $13 billion of mortgages rolling over soon are likely to be better off after the Reserve Bank cut the official interest rate by 50 basis points from 8.0 percent to 7.5 percent.

Home mortgage interest rates started to tumble soon after the Reserve Bank's bold move to ease the pain on homeowners and businesses.

Households could save about $7.30 a week on a $200,000 two-year, fixed-term mortgage over 20 years if interest rates drop 25 basis points.

They could save $14.60 a week on the same amount and term if the popular two-year rate fell by 50 points, though it may not fall by that much in the next month.

The bulge in households rolling over fixed-term loans in October and November is a legacy of the late-2004 mortgage war where banks battled for customers by discounting two-year fixed rates.

But two-year rates will still be higher than two years ago, when they were between 8.05 percent and 8.1 percent on average.

Households will also have tax cuts to help from October 1 $12 a week more for two-thirds of households, $16 a week for middle-income earners and $28 a week for those earning over $70,000.

Reserve Bank Governor Alan Bollard surprised financial experts yesterday with the 50-point cut, designed to prod the main banks into dropping interest rates.

It worked, with several banks dropping a range of fixed and floating rates yesterday and more expected in the next week or so. Kiwibank cut the two-year fixed rate to 8.49 percent, down 36 points. TSB bank dropped its rate to 8.48 percent.

Kiwibank's two-year fixed rate on a loan of $250,000 over 20 years is $800 cheaper a year $15 a week than those of the main trading banks. ANZ, BNZ and Westpac have two-year fixed rates of 8.95 percent.

The fall in the official cash rate (OCR) will make banks' cost of domestic funding cheaper but banks are borrowing about 40 percent of their funding overseas.

BNZ chief economist Tony Alexander said funding from overseas was a lot more expensive than a year ago.

Commentators said it was doubtful the banks would have trimmed home mortgage rates if the official rate had dropped by only 25 points, Bollard's usual cut and what was expected.

It is only the second cut to the official rate in five years.

Some forecasters say the official rate will slide to 6.5 percent as soon as March.

Banks say there is a more than 50 percent chance of another cut of 50 basis points next month.

ASB managing director Hugh Burrett said: "This bold action is just what is needed at this time."

It was good for the housing market and the economy, he said.

Alexander said he expected mortgage rates overall to fall by about 25 basis points.

Bollard told a news conference yesterday he expected banks to pass some of the 50-point OCR cut on to mortgage reductions.

"We think we're giving them quite a lot of room to move," he said.

The New Zealand economy was having a marked slowdown, mainly because households were reining in spending, Bollard said.

"While domestic activity is likely to pick up late this year as a result of personal tax cuts, increased government spending and rising rural incomes, we expect a prolonged period of household-sector adjustment and below-average growth," he said.

Westpac economist Dominick Stephens said the Reserve Bank had feared interest rates for homeowners and businesses would rise further rather than fall because of the credit crunch as banks had not passed on all their increased overseas funding costs.

He said Westpac was still concerned about the outlook for inflation and believed it would be the factor that would slow down further interest rate cuts next year.

Westpac disagreed with the Reserve Bank that inflation would fall to well under 3 percent in three years.

Finance Minister Michael Cullen said after the cut he was confident the economy would start picking up soon.

National Leader John Key said the cut was good news since the economic recession was biting deeper.

 

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