Improving growth outlook will eventually lift fixed rates

Improving growth outlook will eventually lift fixed rates

Green shoot from pebbles

In my last column on interest rates I noted how the government’s announcement of policies which might cause some investors to sell their properties had caused wholesale interest rates to fall. But I also noted that the reduction might be just temporary and that the incentive for conservative borrowers to place part of their interest rate reset exposure into terms like three and five years still remained.

Since then we have seen the wholesale interest rates at which banks borrow fixed to lend fixed rise back up again, though not quite to where they were before. But it is only a matter of time before they do given the many developments abroad which point to higher global inflation, strong growth in the NZ economy, and central banks having to raise interest rates earlier than they keep saying.

Developments overseas

In the United States for instance the rollout of vaccines is proceeding very rapidly and there is talk of near full openness in the US economy come their late-summer. In the UK the planned reopening in June is looking to be on schedule.

These developments are leading to rising optimism about a good recovery in these economies and others, helping to offset the continuing woe and incompetent vaccine rollouts happening in European continental countries.

Expectations of faster growth are driving expectations of higher inflation

Those expectations got a boost just a few days ago when it was reported that almost one million new jobs were created in the United States in March – a result much stronger than expected. Indicators of manufacturing sector activity have also proved surprisingly robust recently. Plus, like in New Zealand and Australia, there are rapid increases in house prices underway which have capacity to boost household spending from paper wealth whilst driving extra construction on top of that set to come from the surge in infrastructure spending planned in the United States.

Locally we are seeing continuing good increases in prices for New Zealand’s main exports, and the tourism sector is about to get a shot in the arm from the April 19 opening of a Trans-Tasman travel bubble.

Will the Reserve Bank increase the OCR?

None of these things mean that the Reserve Bank is going to signal rises in its official cash rate any time soon. Central banks the world over want to ensure that their economies have established good growth momentum with rising inflation before they start warning of rate rises aimed at slowing recovery from the Covid-19 crisis.

But medium to long-term fixed interest rates always move in advance of floating rate changes which are dependent upon alterations in central bank overnight interest rates. This means that the chances remain high that in coming weeks we will start to see banks in New Zealand edging some of their fixed rates slightly higher.

We cannot know exactly when this will happen because it all comes down to how competitive each bank wants to be against others. But a trigger is likely to be when borrowers start to shift their borrowing towards the likes of the three-year fixed rate. We can see this shift starting to happen in my monthly & Tony Alexander Mortgage Advisors Survey.

In the most recent survey undertaken two weeks ago 27% of advisors said their clients were preferring the two-year term and 15% said they were preferring the three-year period. Two months earlier these proportions respectively were 9% and 0%.

Personally, I remain a fan of fixing five years at the 2.99% rate some lenders offer. But most people are not as risk averse as I am and for them it might be easiest to fix just a portion of one’s mortgage that far out while keeping the majority of the debt at a shorter-term rate or two.

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