Take action now - How next week's OCR decision could affect your Kiwisaver

By Paul de Klerk
Investment Specialist

• NZ Reserve Bank expected to cut interest rates next week, possibly by as much as 0.5%
• This rate cut can have a direct influence over your Kiwisaver retirement funds.
• Many investments within Kiwisaver funds are tied to interest rate decisions.
• Wise Kiwisaver members are actively reviewing their structures now to be properly allocated.

Next week wednesday at 2pm the Reserve Bank of New Zealand (RBNZ) is scheduled to announce its last interest rate decision for 2024. While there are mixed expectations, the majority of bank, including ANZ, ASB, BNZ and Westpac, anticipate a significant 0.5% rate cut.

Personally, I feel that a rate cut is inevitable. But with declining inflationary pressures with the Consumer Price Index (CPI) trending toward the RBNZ's target of around 2%, I am also expecting an aggressive 0.5% rate cut. But a case can be made that a more cautious 0.25% is possible.

While this interest rate cut is part of the RBNZ's broader strategy to stimulate the economy, such changes can directly affect your KiwiSaver investments. Wise Kiwisaver investors are therefor reviewing their Kiwisaver structures right now in consideration of the changing economic environment.

How could these interest rate cuts influence different aspects of your retirement savings?

Impact on Fixed Interest and Cash Allocations:
KiwiSaver funds typically hold a mix of asset classes, including cash and fixed interest investments like government or corporate bonds. These assets are closely tied to interest rate movements:

• Lower Returns: A reduction in the OCR will likely decrease the returns on cash investments and newly issued bonds because they offer lower interest rates. For conservative KiwiSaver funds, which often allocate a significant portion to fixed interest, this could result in softer performance in the short term.
• Existing Bonds: However, bonds already held in the portfolio with higher interest rates may gain in value as lower rates make them more attractive in the market.

Boost for Equity Investments:
Lower interest rates can have a positive knock-on effect for shares (equities), which are a key component of balanced and growth KiwiSaver funds:

• Cheaper Borrowing for Companies: With a lower OCR, borrowing costs decrease for businesses. This can boost profitability and, in turn, increase stock prices.
• Increased Investment Appeal: Shares often become more attractive when interest rates fall, as investors seek higher returns than what cash and bonds can offer.

This could lead to stronger performance in KiwiSaver funds with higher exposure to equities, though short-term market volatility should be expected.

Currency Impacts:
A decrease in the OCR can lead to a depreciation of the New Zealand dollar (NZD):

• International Investments: If your KiwiSaver fund holds international assets, the weaker NZD could enhance the value of those investments when converted back to NZD.
• Import Costs: On the flip side, a weaker dollar might increase inflationary pressure, which could indirectly influence how KiwiSaver funds are managed.

What Should You Do Right Now?

Check your KiwiSaver fund type:
Conservative funds may experience slower growth during a period of declining interest rates, while balanced or growth funds could benefit from rising equity prices. Assess your risk tolerance and time horizon to ensure your fund matches your financial goals. If you have never done this, I suggest you contact me for free guidance at www.pauldeklerk.co.nz/contact

Evaluate the performance of your growth fund:
The last 12 months has seen one of the best market performance we have ever witnessed. In light of this growth, it would be wise to evaluated your Kiwisaver providers performance to see how they have grown during this time. Click here to read my own report showing the best performing Kiwisaver growth funds over the last 12 months.

Closing Thoughts
An OCR cut of 0.25% or 0.5% has far-reaching effects, from softer cash returns to stronger equities and potential currency gains. By understanding these dynamics, you can make informed decisions to optimize your KiwiSaver savings.

For free guidance on choosing the best KiwiSaver strategy for your needs, contact me (Paul de Klerk) at www.pauldeklerk.co.nz.

Your KiwiSaver is more than just a savings account—it’s your gateway to a secure future. Stay informed, stay proactive, and keep unlocking its potential!

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PAUL DE KLERK

Paul de Klerk (FSP110367) is a Kiwisaver and investment specialist working for the Financial Advice Provider known as De Klerk Business Services Ltd (FSP1105978). Nothing in this article should be considered as personal financial advice. If you need personalised investment advice, speak to Paul for free at www.pauldeklerk.co.nz/contact. For a disclosure statement visit www.pauldeklerk.co.nz/disclosure

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