Are interest rates set to skyrocket?
In April, the Reserve Bank of New Zealand (RBNZ) left the Official Cash Rate (OCR) unchanged and made the following positive statements about the economy. “On balance, we continue to expect the New Zealand economy to recover in line with or slightly faster than our March Statement projection. Annual CPI inflation, which has been close to 2% for the past year, is expected to track within the target range over the medium term. As previously indicated, we expect to begin removing policy stimulus over the coming months, provided the economy continues to evolve as projected.”
Currently, there is a big difference between the floating and long-term rates and many people are fixing for terms less than two years. The rates for less than two years are still below long-term averages.
The three-year rate is close to the long-term average.
Differing scenarios
I guess the fundamentals remain the same: to provide certainty of repayments you should look at fixing your rates. The big question is, “Will the short-term rates move further than the 8% offered for the longer terms at the moment? Will this happen in the next two years?”
With the strength of the economy now becoming more apparent, there are a couple of routes, which seem likely for the future of interest rates.
One would be for global and especially European financial crises to settle and the RBNZ to start its tightening cycle quickly to combat possible inflation.
This scenario will most likely mean rate increases of around .25% per quarter.
Effectively, under this scenario, the floating rate in particular would possibly move up to the 8% mark within two years.
The longer-term rates may not move up as quickly if the global need for cash returns to normal levels.
We may even see a movement towards a smaller gap between the short term and long- term rates.
Another likely scenario would be that the global financial crisis rears its ugly head again sooner rather than later, putting pressure on the bank funding lines.
There is already pressure on the long-term rates from the increased global demand for cash. There is a feeling amongst economists and RBNZ that the issuance of Government bonds will only increase over the following years, leading to more competition for cash overall.
Under this scenario, RBNZ may not have as much pressure to lift rates as the cost of funding increases naturally. As mentioned in the last budget by RBNZ Governor Dr Alan Bollard, “The increased wedge between the OCR and lending rates, as well as a steeply positive-sloped interest rate curve is expected to make OCR increases more effective than in the past. “Accordingly, these factors should reduce the extent to which the OCR will need to be increased relative to previous cycles.”
Housing Market moves
The housing market leveling off after its upbeat spring is another factor, which puts less pressure on the OCR. These factors may mean a continuance of the current scenario of short-term rates being a lot lower than the long-term rates.
All banks still offer the ability to break up your home loan into two parts, should you really want to hedge your bets.
Short or long, there has always been little in the way of guarantees about the future course of rates. Obviously older clients will find fixing for the long term will give them fewer chances to even out any losses.
The opposite is true for the younger borrower who may be more inclined to look at the longer-term rates as well.
Hamish Patel is an insurance adviser for mortgagesonline.co.nz and can be contacted on (09) 6254693. Email: hamish@monline.co.nz. The above should be taken only as a guideline and not as specific advice. A full disclosure statement is available on request.
Since 1990, Consumer Price Index (CPI) Inflation has averaged around 2.5%. This compares with averages of around 12% in the 1970s and 11% in the 1980s. The rate of inflation has a direct bearing on the Reserve Bank’s OCR. Source: Reserve Bank of New Zealand.
