This is my last column on interest rates for 2022 so Merry Christmas to everyone and I hope a peaceful Summer can be enjoyed by all. Trouble is, that won’t be the case for the many people who have fixed their mortgage rates for only short periods of one and two years in the past two years and now are rolling onto a rate close to 6.5%.
None of us analysts at the start of this year expected the war in Ukraine or China’s futile pursuit of a zero covid strategy with the Omicron variant, and the common view of an official cash rate right now of just over 2.25% was much too low. The rate in fact is 4.25% and the likes of the one-year fixed mortgage rate at 6.5% is well above the 5% - 5.5% I predicted in January.
Back then my recommendation was for borrowers who hadn’t already locked in for five years at the low of 2.99% or even 3.99% to consider fixing for two or three years. I can tell from my monthly survey of mortgage advisers that most borrowers early this year were in fact fixing for 2-3 years. Nonetheless, there is a lot of restraint on household budgets to come as people who did not do that now find themselves having to slash sending on all bar debt servicing and groceries.
I can tell from the new decline in people’s confidence and spending intentions in my latest Spending Plans Survey that the two 0.5% rounds of fixed rate rises since mid-October are going to produce the kind of hefty reduction in household spending which the Reserve Bank is seeking.
Does this mean that the official cash rate might not reach the 5.5% peak in early-April which the Reserve Bank has pencilled in? Yes, or the rate does hit 5.5% in which case there is a chance it starts falling before the end of next year.
Either way, I am 90% confident that fixed rates are now at their cyclical peaks.
The chances are very strong that the fixed rates for two years and beyond will be falling before the middle of 2023 with help from United States inflation recently surprising on the low side, falling oil prices, falling shipping costs and in a few months time better supply chain functioning now that China is opening up to Omicron.
We also learned right after the November 23 monetary policy change that business confidence had newly fallen before the rate change and intentions to hire people and spend on capital equipment had turned negative. Those data plus the sharp pullbacks in house buying and retail spending intentions revealed in my monthly surveys tell us the following. There is a high chance that having over-stimulated the economy by loosening monetary policy too much in 2021 the Reserve Bank is now going to crunch the economy too much in 2023 through too much tightening in recent months and into early-2023.
Our central bank has unfortunately become a source of instability in our economy, currency, inflation, and unfortunately for borrowers, interest rates. It might pay to take their revealed less than optimal performance into account when considering what the best personal interest rate risk strategy might be. That is, never rule out spreading your risk over two or three fixed rate periods rather than just the one as it was generally safer to do in earlier years.
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