Don’t expect interest rates to drop anytime soon

ANZ said it was too early to believe that the Reserve Bank had completed the OCR hike and interest rates would not rise further.

Monday, July 3, 2023, 10:57 am

By Sally Lindsay

ANZ chief economist Sharon Zollner said growth was slowing and the economy had real weak spots, technically speaking the country was in a shallow recession.

“Inflation has also fallen, but I don’t think it’s falling fast enough, especially in the services sector. Of course, it looks like house prices have bottomed out and will continue to rise for the rest of the year.” she says

“We consider ourselves lucky if we don’t see at least one more OCR hike in the end as core inflationary pressures have proven to be somewhat stubborn.”

Mortgage rates could rise further if the RBNZ is forced to raise rates again (or twice), Zorner said.

ANZ’s break-even point shows that mortgage rates need to fall sharply because it’s cheaper in the long run to short and roll and lock in instead of locking in for the long term. .

This reflects both narrowing lending margins and a change in the shape of the wholesale yield curve, which is now significantly inverted. The 1-year swap rate is 5.79%, while the 3-year swap rate is 5.02%. This has also inverted the mortgage curve.

This is important as the wholesale yield curve will only invert as the market believes the RBNZ will end rate hikes and ease relatively soon. On the other hand, RBNZ also said the same thing. The company expects an OCR cut in the second half of 2024, but it is highly contingent on inflation returning to target.

Zorner said the country is in a situation where the market and the yield curve are saying through the implied forward rate or breakeven point that interest rates are going to fall soon, and the trick for borrowers is that what is priced in is low. It is a matter of judging whether it is too high or too high. .

“If interest rates fall faster than the break-even point indicates, borrowers are better off fixing for shorter terms and rolling repeatedly. If the decline is slower, longer corrections are cheaper. increase.

“An old fable says that one bird in the hand is like two birds in the bush. So here’s what’s going on: longer repairs, cheaper prices, or faster fixes, lower expected rates.It’s a tough decision, but overall, the former. , or a combination of both if borrowers want to avoid risk,” she says.

As ANZ’s break-even table shows, fixing at 6.34% for 3 years now is the same cost as fixing at 7.01% for 1 year, 6.08% for year 2, and 5.94% for year 3. It takes

“It’s a sharp drop, especially since the RBNZ has said it won’t cut rates until the third quarter, conditional on lower inflation,” Zollner said.

“Of course it could be, but the point is that in order for the short-term fix to be cheaper, it has to be. Choosing three years from now is already cheaper, and of course more certain. , may be attractive to some borrowers.”

He said that behind the bank’s view that borrowers may want to consider paying off at least some of their debt over time is, in short, a “bird in hand” argument, not a hand. It is not an argument that you should get what you get when you enter.

tag: new zealand

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