Over the past two months we have seen some small reductions in bank fixed mortgage rates in response to relatively large falls in bank wholesale fixed borrowing costs. I've written previously about the way in which the Reserve Bank is likely to have had a word with banks encouraging them not to pass on the reduction in their funding costs because the fight against inflation is still raging.
Unfortunate news for borrowers
Over the past few days we've received information suggesting that the Reserve Bank is going to remain staunchly opposed to any sizable reductions in mortgage interest rates. The key pieces of information relevant to New Zealand interest rates came this week in the Statistics New Zealand labour market release.
During the December quarter the number of people employed in New Zealand rose by 0.4% in seasonally adjusted terms. That is a relatively slow pace of growth in the context of the past few years. The problem is that the Reserve Bank had factored growth of only 0.2% into their predictions for capacity availability in the economy and eventually wages growth.
The unemployment rate rose from 3.9% to 4.0% so it is now back to where it was when the pandemic started in 2020. But the Reserve Bank had expected an increase to 4.2%. Again, from the Reserve Bank's point of view, the numbers are saying that the labour market is easing off in New Zealand but not at a rapid pace.
This would actually be consistent with what we are seeing in other countries and most notably in the United States
Jobs growth there has been unusually strong over the past few months and that perhaps explains why the Federal Reserve Chairman recently pushed back against market expectations of six interest rate cuts this year. He emphasised that the Fed is only planning for three cuts.
The upshot is that bank wholesale funding costs have increased a bit over the past few days, and as mentioned above, the chances that the Reserve Bank behind closed doors will say to banks that it is okay to cut their fixed mortgage rates in reaction to falling fixed borrowing costs are slim.
It is still highly likely that the Reserve Bank will cut interest rates this year rather than the middle of 2025 which they indicated in their most recent set of economic forecasts released in November.
But when they next update their economic projections at the end of this month they are still likely to leave that timing in place as they try to squeeze more inflation out of the economy.
For borrowers, the incentive is still to fix for a short period of time
One or two banks are offering some relatively low six month fixed mortgage rates. The trouble with fixing for such a short period of time is that one will be faced with a decision on whether to fix or not again within a relatively short period.
That might not be a problem for many people these days as often these transactions can be done relatively simply as compared with the early days of fixed mortgage rate resetting.
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