The Reserve Bank looks increasingly unlikely to lift its official interest rate on September 12, but that is not likely to mean good news for homeowners with mortgages. Business editor Dene Mackenzie explains.
Thecontinuation of weak data being released in New Zealand and globally could mean the Reserve Bank postponing further official cash-rate increases until next year.
The Reserve Bank was expected to lift its OCR by 0.25% to 3.25% in September, but Craigs Investment Partners said in an investment note that was looking increasingly unlikely.
With underlying inflation pressures likely to build more slowly than first thought, policy normalisation - raising interest rates back to a more neutral level - could now occur at a more gradual pace.
Given the bank's projections had assumed a 0.25% increase more or less at every six-weekly meeting, that pointed to the likelihood of a pause.
The only question was timing, Craigs said.
"We think the developments over the past month have strengthened the case for slowing the rate of policy normalisation to the point where we now think that even one more 0.25% hike on September 16 is a stretch.
"It now seems most likely that further policy normalisation will be suspended until the beginning of next year."
This week, Craigs' United States economists had significantly cut their growth forecasts for the second half of the year and pushed out the timing of their first forecast rate hike until the second half of next year.
The Federal Reserve this week held its central lending rate at 0% to 0.25%.
Yesterday, the Bank of England revised down its assessment of the United Kingdom's growth outlook.
"We expect that the actions and commentary from the Federal Reserve and Bank of England will reinforce the Reserve Bank's sense that the global outlook has deteriorated since June.
"As the Reserve Bank noted before in judging the global outlook, it pays heed to actions and commentary of other central banks."
Retail bank economists had put a 60% chance on the Reserve Bank lifting the OCR on September 16.
However, Craigs believed the limited domestic data flow between now and then was likely to cause market pricing to fall further as the Reserve Bank's meeting approached.
The Bank of Canada meeting on September 8 would be watched closely by the domestic market, with a pause in policy normalisation in Canada likely to cause the market to further reduce the likelihood of near-term policy tightening in New Zealand.
Westpac chief economist Brendan O'Donovan is part-way through a detailed explanation of the changing interest rate landscape, dealing with both the technicalities and realities of global rates.
The changes would affect every New Zealand household or business that saved or borrowed money - in other words, pretty much everybody, he said.
The first implication of the changes was there would be a greater margin between actual lending rates and the OCR and swap rates.
Banks must now pay well in excess of the OCR or swap rates if they want to borrow money from overseas.
The higher cost of funds had been passed on to customers in the form of retail lending rates that were well above the OCR and swap rates.
Local deposit rates had also been driven well higher than the OCR or swap rates as banks competed for funds, Mr O'Donovan said.
"Banks can no longer borrow as much as they like at the going interest rate from overseas.
"We are now finding that the more New Zealand borrows, the greater the premium it must pay."
Lenders had become wary of lending too much to any one country or bank, he said.
Nowadays, if New Zealanders went on a borrowing spree, banks would find that the cost of raising extra funds would become progressively more expensive.
That would be passed on to borrowers and lending rates would rise independent of the OCR.
Deposit rates would rise in tandem as banks competed for local funds in preference to increasingly expensive overseas funds.
Similarly, if New Zealanders' inclination to borrow waned, then banks' requirement for overseas funding would shrink and local interest rates would fall independent of the OCR.
