Record low interest rates - and what it means for you

DivingInterest-RGB-711May 2019 saw the Reserve Bank of New Zealand lower the official cash rate to the lowest it’s been in New Zealand’s history. This is a significant financial event, with practical implications for most Kiwis. So what does it mean for you?

1. Lower mortgage rates

As the OCR helps banks set the rate of interest you must pay on a mortgage – a lower rate typically means you pay less. This may make housing more affordable for new people buying property, as well as providing current borrowers with the opportunity to pay down debt faster, including by re-structuring or refinancing existing mortgages.

Our mortgage advisers are seeing the benefits of this rate cut flow through to those obtaining mortgages, and the people they assist are seeing some outstanding mortgage rates being offered by the banks.

2. Lower return on bank savings, including term deposits

If you're someone with money in the bank, you’ll probably find it hard to join in the celebration of a round of interest rate cuts.

Record low interest rates are bad news for savers and pensioners with money in the bank. This is because banks will steadily decrease their interest rates on savings accounts and term deposits too. Low interest rates are one of the reasons we often suggest people don’t save money, and instead invest. (Fortunately, people who have an appropriate mix of investments for their risk profile and circumstances should not be concerned by the drop).

3. Higher prices

Closely linked with above, well-known economist Shamubeel Eaqub recently stated "As the New Zealand dollar falls, it makes our imports more expensive." In other words, everything we import – including fuel, vehicles, and electronic goods – can be expected to go up in price.

New Zealand is heavily dependent on imports such as these and increased costs of living will affect many people.

4. Good news for exporters and those invested overseas

If the New Zealand dollar stays low as is expected, that’s good news for those who export products overseas – such as milk, beef, lamb, and tourism – as overseas buyers can purchase more of our goods and services with their local currency (they get more bang for their buck!) and New Zealand businesses generate more income which is good for the New Zealand economy.

Also, lower interest rates may be good news for investors, including those invested into KiwiSaver schemes. As people get fed up with their money sitting in the bank fetching a very low return, it’s likely this money will flow from bank savings into such investments and this could drive up share market values, helping to boost investment returns. Most investments, such as KiwiSaver or managed funds, are also heavily diversified with some exposure to overseas markets. With a lower New Zealand dollar, this means their value may increase when the value of those investments is considered in New Zealand dollars.

The bottom line

Most commentators expect that interest rates will stay low over coming years, especially with the prospect of employment levels and inflation weakening. In fact, some of the major banks are already predicting interest rates may be cut again before the end of the year!

Here are four ways you could be impacted:
  1. Lower mortgage rates
  2. Lower return on bank savings, including term deposits
  3. Higher prices on imported goods bought in New Zealand
  4. Good news for exporters and those invested overseas.