From Tony Alexander

“Developers have excess stock that they need to move because of financing pressures. For investors this is not bad news. Apart from positive changes to the bright-line test and some tenancy rules an opportunity to buy a property at a good price may have improved”.

Mortgage Borrowing Strategy- Tony Alexander Economist

The key focus for NZ interest rate markets was the review of monetary policy last week by the Reserve Bank. As was universally expected they left the cash rate unchanged at the 5.5% level they took it to in May 2023. At times like these when no rate change is expected the focus of analysts is very strongly on the words the Reserve Bank uses to describe the inflation situation and outlook and the way in which they describe the likely monetary policy track. In that regard there were indications that they recognise the NZ economy may be on a weaker track than they have been assuming. Specifically, they noted “A range of business and consumer surveys, and higher frequency spending and credit data, all point to declining activity. Members discussed the risk that this may indicate that tight monetary policy is feeding through to domestic demand more strongly than expected.” They also tweaked their comment about when inflation will fall within the 1-3% band. In the May Monetary Policy Statement they wrote “The Committee noted that annual headline CPI inflation was expected to return to the target band in the December quarter of this year.” But now they have in a number of places in their much shorter commentary “Headline inflation is expected to return to within the 1 to 3 percent target range in the second half of this year. They also did not repeat the comment from May of the following. “Monetary policy may need to tighten and/or remain restrictive for longer if wage and price setters do not align with weaker productivity growth rates.” Finally, in May they wrote “The Committee agreed that interest rates need to remain at a restrictive level for a sustained period to ensure annual headline CPI inflation returns to the 1 to 3 percent target range.” This time they wrote the following. “The Committee agreed that monetary policy will need to remain restrictive.” The comments were certainly not indicative of an intention to ease monetary policy in the very near future. But they were more dovish than expected and this has caused a rally in wholesale fixed borrowing costs. The one-year cost to banks of borrowing money to lend fixed for one year has fallen to its lowest level since October 2022 near 5.05% from 5.3% last week. The three-year borrowing cost is near 4.35% from 4.62% last week – the lowest level since the very start of this year. At these levels scope exists for fixed mortgage rates to fall up to 0.7% for the one-year term to 0.4% other terms. But I doubt this will happen immediately. Banks will be wary of a warning from the Reserve Bank that they are moving too soon and like everyone else these days there are extra costs which need to be priced into selling prices (mortgage rates). If I were borrowing at the moment, I would fix six months