In a surprise move, the Reserve Bank of New Zealand has decided to slash the official cash rate (OCR) by 25 basis points, down to an all-time low of 2.25 per cent. While banks have reportedly not yet adjusted their rates to the change, such a sudden and drastic cut will almost invariably affect how property investors obtain their capital.
Why the drop?
The Reserve Bank previously indicated in its December Monetary Policy Statement that the previous drop to 2.5 per cent would be enough to maintain the economy at an acceptable level. The circumstances, however, have changed.
"The outlook for global growth has deteriorated since the December Monetary Policy Statement, due to weaker growth in China and other emerging markets, and slower growth in Europe," said Reserve Bank Governor Graeme Wheeler.
"Financial market volatility has increased, reflected in higher credit spreads. Commodity prices remain low."
Evidently, the "accommodative" monetary policy that the Reserve Bank said might be necessary has needed to come into effect a lot earlier than expected.
Good for mortgages, bad for saving
The OCR governs a number of different industries, but is of particular note for the property industry. While Auckland house prices remain high, the value growth has moderated recently, opening the market to new investors – lending rates may also soften as a result of the OCR drop.
Meanwhile, savers who have not taken to residential property investment could be seeing their accounts stagnating as banks adjust their rates to match the OCR. Head of Investor Education at the Commission for Financial Capability David Boyle described how he was concerned that inexperienced investors may decide to splash their savings without enough research.
"If you see some new options coming out it would be really important to look at the risk associated with that," he said to the New Zealand Herald.
"It's all about getting your money back."
So, have you weighed up the risks and rewards? Get the right financial advice and find out how to reduce your investment risk.
Here's to your financial independence!
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