Mortgage rates may only fall another 0.4% says Westpac

Monday, 24 August 2020

Westpac says further fall in OCR won’t all feed through to mortgage rates even if it came with a new Reserve Bank term lending facility to encourage pass-through.

Mortgage rates might only have another 30 or 40 basis points to fall even if the Reserve Bank does cut the Official Cash Rate to minus 0.5 per cent next year, Westpac says.

The bank is currently forecasting the Reserve Bank will slash the OCR by 75bp in April.

The central bank has signalled it may establish a “term lending facility” under which it would lend money to banks at very low rates to encourage them to pass on the benefit of future OCR cuts to borrowers.

Reserve Bank assistant governor Christian Hawkesby has said such a facility could give banks more confidence to lower term deposit rates.

But Westpac senior economist Michael Gordon said such a facility would have only a “marginal” effect on mortgage rates.

Westpac doesn’t expect banks to turn away depositors or charge many of them negative interest on their savings if the OCR falls below zero next year.

* A decade of saving and above average income required to buy a house in Auckland

* The family with the lowest mortgage rate in New Zealand

About a third of bank deposits already earned zero interest or close to that, Westpac said in a bulletin.

Gordon said he did not believe that banks would refuse to let customers deposit money or would start “paying” negative deposit rates on mainstream accounts, even if the OCR did go below zero.

“There is a hard core of bank funding where you can’t realistically take the cost of it below zero.”

That meant banks’ funding costs could not fall much further even if they were provided with a new cheap source of cash from the central bank.

“Taking the OCR below zero would work in much the same way as a ‘conventional’ OCR cut.

“However, we don’t expect that it would transfer through to retail rates one-for-one,” Westpac said.

The lower the OCR went, the less additional impact that would have on retail lending rates, it said.

“We estimate that an OCR cut from 0.25 per cent to -0.5 per cent would probably reduce mortgage rates by only about 30-40 basis points.”

OCR cuts below about -1 per cent would have no effect at all, it said.

Gordon did not rule out some mortgage rates falling below 2 per cent.

But he also cautioned some of the expected benefits of a negative OCR had already been anticipated and passed on to customers, given there was now a consensus that was where the OCR was heading.