Thank goodness recently I warned of upside moves by banks for their fixed mortgage rates. As everyone is probably aware of by now the inflation number for the year to September turned out to be much higher than the 6.5% rate commonly expected at 7.2%. The underlying rate was a lesser 0.3% above expectations but that doesn’t really matter.
Inflation is unfortunately failing to fall as quickly as anticipated here in New Zealand
That means interest rates have more work to do to restrain the pace of growth in our economy and get inflation down.
The common expectation in the markets now is that the Reserve Bank will take its cash rate from the current 3.5% to just over 5% early next year. I still don't think they will have to go that far, but a move to 4.5% looks guaranteed.
Anticipation of more action from the Reserve Bank has been factored into the wholesale borrowing costs which banks encounter when they lend to you and I at a fixed rate – sometimes called the swap rates. The one year swap rate banks must pay for instance has now climbed to just over 5% from 4.4% a month ago and 3.6% at the start of June.
The three year swap rate has risen to near 5% from 4.4% a month ago and 3.9% at the start of June. I have definitely got wrong my view that inflation would ease off and we wouldn’t see fixed rates exceeding the peaks they reached in the middle of June. They already have for the first bank to raise their rates following the shock inflation result and the other banks will follow in order to rebuild crunched lending margins.
All I can say (again) is thank goodness over two months ago I stopped producing my weekly table of picks for where one year mortgage rates would average over the next 1 – 5 years. I did that because of the large number of uncertain factors in play and the way in which banks were failing to try and maintain their lending margins as their funding costs increased.
The big question of course is this
Do I still think interest rates will be falling towards the end of 2023 and that fixing at one year or two years at most is the optimal strategy for most borrowers? Yes, I do and if I were freshly borrowing or rolling over an old fixed rate at the moment I would just fix largely for one year. Why?
Because the extra downward pressure which will now come on the economy as people roll from the likes of 2.5% mortgage rates to ones near 6% means when inflation falls away it will probably do so at the same pace or more rapidly that was going to occur before this week’s surprisingly high inflation number.
Can we be firmly certain in this outlook? Not at all
None of us know what is going to happen in Ukraine and where energy and food prices are headed globally. We don’t know (just proved it) the up to date links between interest rates and inflation, and we are very uncertain about how wages will respond these days compared with the last time monetary policy was tightened in a sustained manner from 2004 – 2008.
That means we cannot completely rule out the worth of fixing some of one’s debt at a fixed rate for three years. But it pays to remember that central banks always win in their inflation fights and the higher they have to take rates up, the greater and sometimes the more sudden will be the speed of the decline when we are convinced the inflation genie is back at the bottle.
That is what I feel may be the situation come the very end of 2023. Let’s see how we go this time!
To sign-up to my free weekly Tony’s View publication go to www.tonyalexander.nz