“The thrill might not be as big as what it looks like,” Orr said.
The issue is the OCR isn’t the only thing that influences the interest rates consumers and businesses pay.
Geopolitical factors are putting upward pressure on the interest rates banks pay to borrow money from international money markets to then on-lend to Kiwis.
OCR changes have never translated one-for-one to mortgage rates’ changes across all terms, with the OCR more directly influencing floating rates and those for loans fixed at shorter terms.
But the global economic environment is currently such that borrowers shouldn’t all expect to enjoy dramatic interest rate cuts.
The RBNZ only expects the average interest rate banks receive for all their mortgages on issue falling from 6.4% to 5.8% in a year.
“It’s not a big decline,” Orr said.
The RBNZ explained, in its quarterly Monetary Policy Statement, that the outcome of the US election was putting some upward pressure on banks’ funding costs.
Even though central banks around the world are cutting interest rates, longer-term sovereign bond yields have jumped.
Investors believe the tax cuts President-elect Donald Trump has promised to deliver in the US will result in the country’s books sinking further into the red. Increased economic uncertainty and higher inflation expectations, on the back of Trump’s tariff threats, have also introduced risk, which investors have priced into longer-term assets.
Higher sovereign bond yields in major economies such as the US affect the interest rates New Zealand banks pay to borrow money from offshore. This ultimately trickles through to interest rates Kiwis pay.
Again, Orr affirmed this, saying borrowers’ “enthusiasm may be tempered a bit, now that they’ve seen other global influences going on”.
Craig’s Investment Partners’ investment director Mark Lister made the same point in a recent column he wrote for the Herald.
He also cautioned overly enthused borrowers that banks had already priced in OCR cuts.
And, he made this point; the Covid-era Funding for Lending Programme saw the RBNZ create money and lend it to banks at a relatively low cost (the OCR) throughout 2021 and 2022.
This meant banks didn’t need to increase mortgage rates by as much as one might otherwise have expected, as the RBNZ hiked the OCR between 2021 and 2023.
Accordingly, mortgage rates won’t have as far to fall now the OCR is being cut.
All this might seem to contradict talk in recent months that OCR changes would flow through the economy relatively quickly, because borrowers have been refixing their mortgages at short durations.
This is still true – people will soon feel the effects of a lower OCR, if they haven’t already refixed on to lower mortgage rates.
The pinch is this relief might not be as soothing as some expected.
The other big factor that affects mortgage and term deposit rates is competition between banks and other institutions.
One could argue that because banks’ net interest margins are above their recent historic averages, they have enough fat to absorb some of the higher funding costs they face.
Orr made the point: “In a competitive world, margins don’t have to stay exactly the same ...
“As the level of business activity picks up, one would hope competitive pressures pick up and we see margins normalise … decrease.”
All eyes will be on the RBNZ over the next few months – not only to see how much it cuts the OCR by when the Monetary Policy Committee next meets on February 19.
But also, to see how receptive it is to the Government pressuring it to tweak the way it regulates banks in the hope that this would drive more competition and see the market operate more efficiently.
Jenée Tibshraeny is the Herald’s Wellington business editor, based in the Parliamentary press gallery. She specialises in Government and Reserve Bank policymaking, economics and banking.
