If you’ve got a mortgage, or know someone who has, you’ll know the relief the long-heralded drop has brought. It’s only the start, but the Reserve Bank has clearly spelt out both its intention to drop the OCR and its belief why this could happen fairly quickly. Interestingly, our Reserve Bank has been ahead of its Australian counterpart, in being early to raise the OCR in the first place and now to drop it.
Falling interest rates contain both good and bad news. They’re great if you’re a borrower, such as a business or a mortgage-holder – or the NZ government. However, if you’re someone reliant on term deposits for income, drops are not so good. (It’s one reason why we have always cautioned against using term deposits for all or most of a person’s investments).
What does this mean for investment portfolios? In short, good news across shares, property and bonds:
- Companies find it cheaper to borrow, and their customers have more spending power, so sales and hence profits rise – as should share prices.
- Likewise, commercial property investments for example, have lower borrowing costs and hence a bigger margin to pay decent yields.
- It creates more of a difference between short-term and long-term interest rates, so it’s easier for a bond to generate steady and consistent total returns (capital gain and regular income).