Since the Reserve Bank raised its official cash rate to 5.5% on May 24 and said that no further increase was being contemplated, fixed mortgage rates have moved higher.
The one year fixed rate for instance has risen from near 6.7% to 7.3% and the three year rate from about 6% to almost 6.9%. As mentioned here previously, these increases have been driven by rises in interest rates in the United States because of a lift in inflation worries.
Changes in US interest rates tend to have an impact in much of the rest of the world.
That means when US rates fall, we can reasonably expect bank fixed rate borrowing costs here to go down as well. That has been happening over the past three weeks.
Data on wages growth in the US has come in recently slightly lower than expected and the same has just happened with their inflation numbers. The data still show inflation as not safely back near 2%. But the direction of travel is now being considered as more certain than a few months back and this has caused a decline in US interest rates.
Here the cost to banks of borrowing money fixed for one year has declined about 0.2%, for three years 0.4%, and five years 0.5%. Given these new and lower borrowing costs and offsetting them against the new and higher bank mortgage rates, is there scope for banks to start cutting their lending rates?
The answer is yes, but whether they will is very much in doubt.
I calculate average bank lending margins for periods of one to five years and work out two year averages. The current one year fixed rate lending margin being earned by banks is about 0.4% above average, the three year rate 0.3% above average, and the five year rate 0.1%.
Greatest scope for a rate cut exists in the 12, 18, and 24 month areas where people have been doing almost of their rate fixing recently. But it pays to note that banks do not yet seem to be very keen on winning new business. There have been no spring mortgage campaigns this year.
Their attention still seems to be mainly on getting investor debt down, meeting the still stringent requirements of the revamped Credit Contracts and Consumer Finance Act, and building up capital for tighter lending regulations.
I would be surprised if any bank cuts its mortgage rates in the next few weeks and don’t expect the Reserve Bank will indicate any expectation of such cuts when they next review monetary policy on November 29. But cuts are quite likely before the review three months after that at the end of February – unless the United States data start getting worse again.
Here in New Zealand some justification for the Reserve Bank to express comfort about inflation falling but not actually being willing to cut their 5.5% cash rate may come from data likely to show slowing wages growth. The boom in net migration inflows to 119,000 in the past year will suppress wages growth probably to a greater degree than it will boost rents.
Retail spending is likely to remain weak through Summer.
Activity levels in the home building sector will also shrink further. Inflation expectations are highly likely to fall away a bit more, while global inflationary pressures also are likely to continue to ease.
This far out it is impossible to take a strong position on the speed with which mortgage rates will fall through 2024. But whatever the speed, if I were fixing my mortgage rate currently, I would still feel inclined to fix over the 12 and 18 month terms.
The time for long-term rate fixing may come two to three years from now.
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