U.S. Federal Reserve cuts rates for first time since 2008
Last week U.S. Fed cut rates to prepare the US economy for “downside risks”. The US Federal Reserve has cut its key Fed Funds cash rate by 0.25% to a range of 2-2.25% on the 1st of August. The rate cut is the Fed’s first rate cut since December 2008 and follows nine 0.25% rate hikes between December 2015 and December last year.
US growth is slowing but not to recessionary levels. Trade is the key issue in the US. President Trump’s application of tariffs to combat Chinese imports won’t work and is more a political ploy for his voting support base ahead of the US election in 2020. The reason tariffs won’t work is that they will only make it more expense for the US consumer who will be paying 25% more on goods out of stores such as Walmart, slowing spending therefore further slowing the US economy. It is highly likely once we’re in the run-up to the US election next year Trump will provide relief to the US – China trade crisis and come to an agreement with the Chinese
In summary rate cutting cycle tends to be good for markets however this should be balanced with current downside risks around the world. Here’s more comments on Fed Chairman’s Powell “midcycle adjustment” comments last week.
Reserve Bank cuts NZ OCR to a record low 1.0%
On Wednesday this week, the Reserve Bank of New Zealand (RBNZ) announced a rate cut of 50-basis-points to a record low Official Cash Rate (OCR) of 1.0%, citing "heightened uncertainty and declining international trade" and low inflation. Economists are praising the Reserve Bank's "proactive" move to slash interest rates.
Following the Fed Reserves rate cut last week other banks around the world have been dropping their cash rates too - India and Thailand slashed theirs on Wednesday - in a bid to boost spending and protect local economies from the worst effects of declining international trade.
So, what does this mean for you?
The banks have followed suit – In terms of debt, ASB was first to announce cuts to its variable, Orbit and 2-year fixed rates, and has since been joined by ANZ, BNZ, Kiwibank and Westpac. While this move means now could be the time to buy or at least review your current mortgage, it also means less money for cash savers.
The RBNZ has said that the cut is to encourage additional spending from households, businesses, and the government, to meet inflation and employment targets. While fixed interest investments are now less appealing, falling interest rates are generally positive for shares. They help boost economic and profit growth and make shares relatively more attractive than cash.
With the cost of borrowing at an all-time low, the Government has been told to seize the moment and invest in New Zealand's ailing infrastructure.
The Reserve Bank's "stunning" cut to the official cash rate means it's a very good time to invest in New Zealand, according to Finance Minister Grant Robertson.
If you would like to review your existing mortgage structure given the RBNZ’s announcement this week or to review your investments to ensure you are diversified & reaping the benefits of a low interest rate environment, contact our office today.