Two weeks ago I wrote about how fixed mortgage rates for periods of two years and beyond may be at or very close to their peaks this cycle. Since then, a few things have happened which reinforce that view.
Firstly, wholesale rates that the banks borrow at are coming back down
The wholesale borrowing costs facing NZ banks for fixed rate lending have fallen away quite a bit. The two year cost to banks of borrowing in the wholesale markets for instance has declined to near 3.9% from 4.15% at the end of June and 4.5% in the middle of last month.
These and other rate falls have been driven largely by a surge in worries about world growth and United States economic growth in particular. Forecasts of a global recession have lifted and that means inflation pressures falling away sooner than the markets were thinking just four weeks ago.
That means interest rates probably won’t have to be forced as high as earlier feared in the major world economies and that has fed through into some lowering of rates here as well. These pressures have added to some pullback in rate-rise expectations in New Zealand on the back of sharp weakness in measures of consumer and business confidence.
Too soon to expect inflation to ease off
But before we develop near 100% certainty that fixed mortgage rates will now fall, it pays to remember that with economies not behaving as they used to, our central bank cannot blindly assume that economic weakness will feed through into lower inflation as used to be the case.
They are still going to take the approach of risking a deep crunch in economic activity by boosting interest rates so that they can be certain that the inflation rate will settle back below 3% within a reasonable period of time.
The (OCR) Official Cash Rate has gone up to 2.5%
In that regard, on July 13 the Reserve Bank raised its official cash rate by 0.5% for the third time this cycle and stated that they still see their now 2.5% cash rate peaking at almost 4% in the middle of 2023.
There is a good chance the peak will be 0.5% lower than that, and that is why we are seeing some easing in the medium to long-term fixed borrowing costs and mortgage rates. These rates are starting to include expectations that the Reserve Bank will cut interest rates from perhaps as early as the second half of next year.
The upshot is that for most borrowers there is little value in fixing for longer than a two year period now
Not unless one has a view that inflation will persist for a very long period of time. A big test in that regard will be the extent to which the labour market weakens in coming months.
The Reserve Bank have explicitly stated that as things stand currently the level of employment in New Zealand is above that which can be sustained without wages growth surging and inflation being forced to consolidate above the 3% upper limit of the target range.
Until we get some solid indications of labour market weakness the Reserve Bank is unlikely to signal much in the way of weakening intentions to push interest rates higher. That then is why much as my predictions for interest rates imply that fixing one or two years is optimal, one should not rule out considering fixing a portion of one’s debt for a longer period.
Huge uncertainties continue to dominate our economic outlook and borrowers, investors, home buyers and all businesspeople should keep that in mind when undertaking planning for the coming year.
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