NZ Interest Rates Hit Historic Low, Dollar Follows

The NZ Reserve Bank has knocked 1.5% off the base rate to give New Zealand an official cash rate of 3.5% – the lowest rate for the country ever. Its a dramatic decline from the 8.25% the cash rate stood at in the middle of 2008

The major banks have taken the hint and interest rates, which at their peak in middle of 2008 were hitting 11%, are now around 7.5% for floating mortgages and fixed rates are on offer of less than 6% for a 12 month term.

Its a big drop for the small economy and the fallout is predictable. Today NZ$1 bought just US$0.50c – a six year low. And six years ago the interest rates where around the same as today’s levels. New Zealand’s small open economy is loved by international currency speculators, especially the Japanese – where else in the world have you been able to get bank deposits at 8% in a stable, western democracy  as recently as last year?

The New Zealand economy is already in negative growth territory and the number of mortgagee sales are increasing -though to date mainly developer’s stock rather than private mortgagees. Fundamentally the financial sector appears to be in reasonable shape and its even getting easier to get overseas financiers, theough at an unaccepetable cost.

The property cycle begins again though as building consents plummet to the lowest leavels in 20 years.

The New Zealand Herald reports:

“ASB economist Jane Turner said that falling house prices and low immigration had reduced the incentives to build.

“In addition, rising unemployment and tight credit conditions have dampened the stimulatory effect of lower interest rates. However, the fall in interest rates appears to have helped house sales to tentatively form a bottom, suggesting the further declines in dwelling consents will be more moderate.”

Things don’t look good for domestic demand for housing either. First home buyers in New Zealand are unlikely to get the generous grants common across the Tasman in Australia. The banks are enforcing stringent deposit levels. The median price of a New Zealand house is still $328,500 so  the average borrower still needed $66,000 to pay the 20 per cent deposit required by many banks.

Many commentators are seeing another 5% drop of prices likely before the property market begins to  pick up – its all a far cry from Detroit’s average price of US$7,500 - which even at today’s exchange rate looks a bargain to any New Zealand property owner.

The  moment those immigration rates turn around, watch for the New Zealand property market to take off again. Last time it took the September 11 attacks, I wonder what it will be this time?

Financial markets are now pricing in a further cut of at least 75 basis points on March 12, according to Credit Suisse’s swaps-based indicator.