The Official Cash Rate (OCR) might still be on a downward track, but wholesale interest rates have taken an upward turn in the wake of the Reserve Bank’s (RBNZ) latest OCR decision.
Wholesale rates—a.k.a. swap rates—jumped by almost 0.25% in the days after the announcement on 28 May. They’ve settled somewhat since then, but are still sitting a few basis points above where they were back in late May.
So, how is it that wholesale rates are going up even as the OCR continues to drop?
Basically, the forces dictating what happens with the OCR are different to those that determine what happens with wholesale interest rates. The former is largely driven by domestic factors, while the latter is much more influenced by what’s happening globally.
The RBNZ is basing its OCR decisions on what’s happening with the New Zealand economy—which is still looking pretty weak. It’s said we can expect interest rates to come down a little further from here, too, ultimately settling at 3%. There’s a case to suggest that it could get even lower than that, potentially down to between 2.5% and 2.75%, depending on our economic recovery.
Meanwhile, global forces—specifically out of the US—are holding wholesale interest rates up.
The prospect of higher US inflation as a result of trade tariffs means US interest rates are likely to stay higher for longer, and that’s going to hold longer-term interest rates in New Zealand up as well.
(With the American economy starting to show signs of weakness as well, there are concerns that the US could be headed for a bout of stagflation i.e. high inflation + low growth, which is the last thing anyone wants.)
Does this mean mortgage rates are heading up as well?
Wholesale rates have a direct impact on lenders’ borrowing costs—they’re the rates banks borrow money at—and so higher wholesale rates do have the potential to translate through to higher mortgage rates.
But we’re seeing good levels of competition among the banks right now (as they vie for market share) and that’s meant mortgage rates have actually continued to track downwards over the last couple of weeks.
As long as that competition remains, we’re probably not going to see any real increase in fixed term rates. That said, it’s important to note we’re unlikely to get too much more downward movement in mortgage rates from here either. They’ve largely done their dash.
So, what should borrowers be doing in this environment?
At the moment, the best one-year fixed rate we're seeing is at 4.89%, while 4.95% is the best rate on offer across the two- and three-year fixed terms.
The advice to borrowers is still much the same as its been in recent weeks—which would be to seriously consider splitting your loan across a mix of shorter and longer terms.
Having part on a one-year fixed rate, for example, means you’ll be in a position to take advantage of (hopefully) lower rates when that loan matures. And if you can get a two- or three-year fixed rate at less than 5%, that’s a good rate—and means you’ll have interest rate certainty over that portion.
Check in again next week for the latest news on New Zealand interest rates.
