Another rate cut could help stimulate the economy
All eyes are on the Reserve Bank of New Zealand (RBNZ) this week, as Kiwis eagerly await the central bank's next move.
RBNZ meets on Wednesday to discuss the country's official cash rate, which has been locked in at 4.25% – the lowest rate in two years – since November.
Yet many – including all of New Zealand's major banks: ABS, Kiwibank, ANZ, BNZ and Westpac NZ – are anticipating the bank will knock off another 50 basis points, or 0.5%. That would bring the OCR down to 3.75%.
That could help stimulate New Zealand's sluggish economy by increasing borrowing capacities.
"Any drop in interest rates makes people feel a bit more confident in buying their first home, or borrowing a little bit more for renovations, or whatever. And that also helps investors, helps make the numbers a little bit more feasible," Craig Pope, founder and mortgage adviser at Wellington-based Craig Pope Financial, told the New Zealand Adviser.
"[Lower rates] give people another reason to feel a little bit better about the overall situation," Pope said. "If they know their interest rates are starting to track a bit better, then they might start to think, 'Oh, we've been thinking about upsizing our house, or doing a renovation.' And if the economy starts to be a little bit less volatile with people losing their jobs, then they start to feel a little bit more confident in borrowing money."
One of the RBNZ's primary drivers on its decision will center around inflation. Last month's consumer price index revealed that inflation in New Zealand remains steady – up 0.5% for the quarter, or 2.2% for the year – and in line with expectations.
In addition, increased unemployment, which ticked up to 5.1% earlier this month, might further influence the bank. Rising unemployment rates have left some would-be homeowners cautious about entering the market at a time when job security is still questionable. Meanwhile, for those without a job, borrowing might not be an option at all.
Kelly Eckhold, chief economist at Westpac NZ, has previously predicted rate cuts at this month's meeting.
"But after that we think they're going to slow down the pace of easing," he said. "We think inflation is going to rise a little bit this year as the impact of the weaker exchange flows through. But after that, it's going to drop back, closer to 2%.
Either way, the lower interest rates, alongside strong export commodity prices, will likely result in further economic growth of about 2.5% for the year.
"That's going to support the housing market; it's going to support household spending and ultimately businesses," Eckhold said.
