The RBNZ keeps the OCR at 0.25% - what does this mean for you?

The latest community outbreak of COVID-19 shows how quickly things can change and provides another reminder that COVID-19 is going to keep impacting our lives for a while yet.  

The latest outbreak has had immediate repercussions for one of our key economic forecasts for 2021. Until the outbreak announced on 17th August, we had been expecting the Reserve Bank of New Zealand (RBNZ) would lift the Official Cash Rate (OCR) at its meeting on 18th August. 

The OCR is an interest rate set by the RBNZ. The OCR influences the price of borrowing money in New Zealand, so influences home loan rates (mortgages), term deposit and savings account rates.  The outlook for interest rates can also impact the sharemarket.

At last week’s meeting, the RBNZ decided to keep the OCR at 0.25%, as we had concluded it would at the 11th hour when the latest community case was announced by the Government. Reading through the RBNZ’s forecasts, it is clear the current outbreak was the only reason to remain on hold – otherwise it appears the RBNZ intended to lift the OCR at an orderly pace starting from this meeting.  The RBNZ’s forecasts, made prior to the lockdown, suggest the RBNZ expects the OCR to eventually peak around 2%. 

Based on these predictions, borrowers will need to budget for higher borrowing costs over the year ahead, despite the pause from the RBNZ at its August meeting. For savers, the message remains the same: if your long-term plans aren’t changing, there’s usually no need to change your investment plans, despite the uncertainties of recent times. Investing is all about trying to get your money working hard, so you can enjoy the things that matter to you.

Assuming the outbreak is stamped out relatively soon, we expect the RBNZ to return to its plans and start lifting the OCR. The next scheduled meeting on 6th October appears a likely start date. However, this view is highly conditional on a short-lived lockdown. Accordingly, local financial markets (and economists’ forecasts) will be sensitive to the run of COVID headlines over the coming weeks. 

Australia’s situation is a warning that events can quickly get more complex. The evolution of New Zealand’s latest outbreak will be a very important influence on the RBNZ’s actions over the rest of this year. Related to this, we expect the outlook for NZ interest rates including mortgages and term deposits to be fluid over the near-term.  

ASB’s current outlook for the OCR – based heavily on the lockdown being short enough to cause little long-term damage – is that the RBNZ will lift the OCR 0.25% in October, November, and February, taking it to 1% in early 2022, before gradually nudging up another 0.5% to a 1.5% OCR setting by the end of 2022. This outlook should be taken as a rough guide that can change quickly as the situation unfolds, but the key message is we still think the direction for interest rates is ‘up’ over the next year or so.

One thing that has changed over the past year is the collective response of investors to events like this around the world, and the associated reaction in financial markets. Back in March last year, the arrival of the pandemic triggered a significant drop in sharemarkets around the world, and a drop in the NZD exchange rate. In contrast, many of the world’s major sharemarkets have set fresh highs over recent weeks, despite the latest increase in global COVID-19 cases related to the Delta variant. And here in New Zealand, the sharemarket has lifted over 3% in the week following the lockdown news, and the local currency has continued to trade within recent ranges, in contrast to its early 2020 plunge.  

That’s reassuring – after all, we’re going to keep getting a lot of news about COVID-19 in the future, but if your long-term plans aren’t changing, there is usually no need to change a well-thought-out investment plan. 

ASB has a number of investment choices and the expertise to help you find the right investment to meet your goals. If you’d like to talk to someone, call us on 0800 803 804 or check out our Help me choose tool to review our fund options.