Floating mortgage rates are now more attractive than fixed rates after the Reserve Bank's dovish comments in its monetary policy outlook yesterday, Westpac chief economist Dominick Stephens says.
The pick comes less than two months after Stephens touted two to four year fixed rates as looking the best bet for borrowers, when he said rising wholesale swap rates could see fixed rates stop falling, and begin to rise.
His comments back in March sparked debate among a number of bank economists, with ANZ chief economist Cameron Bagrie saying the 'hoop-la' about fixing looked at odds with the Reserve Bank's assessment of where rates were headed. See Stephens outline his latest views in this video here.
Reserve Bank Governor Alan Bollard yesterday delivered a relatively dovish statement on where the Official Cash Rate (OCR) might be headed as he kept it on hold at its record low of 2.5%.
The comment from Bollard that got economists most excited was aimed at the high New Zealand dollar, which the Reserve Bank said had remained elevated despite falling commodity prices.
"Should the exchange rate remain strong without anything else changing, the Bank would need to reassess the outlook for monetary policy settings," Bollard said.
In its March Monetary Policy Statement, the Reserve Bank indicated it was pricing in only 75 basis points of OCR hikes over the next three years. Economists and the market read Bollard's comment yesterday on the outlook for monetary policy settings as flattening that view, and that there was an outside chance the next move in the OCR might be down.
Wholesale, or swap, rates fell on the comments, although the currency immediately rose. Kiwibank quickly moved to introduce a new "special, limited time" one-year home loan interest rate of 4.99%, under cutting the rates advertised by its rival banks.
Change of mind
In his weekly video on Friday morning, Stephens said the Westpac team now saw floating rates as better value to borrowers than fixed, a turn-around from March. He said the Reserve Bank yesterday made no mention whatsoever about raising the OCR, whereas it had included such a reference in its March statement.
“What they seem to be saying now is, the most likely scenario is interest rates will be kept unchanged, but there is a possibility the next move could be in a downwards direction," Stephens said.
It wasn’t the domestic economy or inflation that was concerning the Reserve Bank, rather it was that the exchange rate remained strong despite signs of weakness in the global economy and falling commodity prices.
“The Reserve Bank’s telling us that if the exchange rate stays high and commodity prices keep falling, exporters could face a double-whammy, there could be downward pressure on inflation, and they may need to reduce the OCR," Stephens said.
In Westpac’s opinion, cutting the OCR at this stage would not be the right thing for the Reserve Bank to do.
“We think it could stoke the housing market, and that with the Canterbury rebuild coming, there is some inflation pressure ahead for this economy. We continue to expect higher interest rates over 2013/14/15," Stephens said.
“Now a couple of months ago we flagged that we thought two-year to four-year mortgage rates were better value than floating. At the time, wholesale interest rates had risen quite sharply, and there’d been no response on retail mortgage rates," he said.
“The situation’s really changed. Recently, wholesale interest rates have been falling, and with this week’s OCR review, they’ve fallen further.
“Floating mortgage rates now look like better value, at least for now, than fixed," he said.
What Bollard meant
Bollard's comments on "the outlook for monetary policy settings" related to the Reserve Bank's forecast 90-day bank bill rate track. In its March MPS, the RBNZ forecast the 90-day rate would rise from 2.8% in the March 2012 quarter to 3.1% in the March 2013 quarter, indicating the OCR would be 25 basis points higher – 2.75% - at this time.
The MPS forecast the 90-day track to then rise to 3.6% by the March 2015 quarter, suggesting an OCR of 3.25% at that time - 75 basis points above its current level.
That outlook would only be reassessed if the New Zealand dollar remained high, and without "anything else changing". The comment on 'anything else' meant just that - it did not mean changes from the Reserve Bank's forecasts.
So if the NZ dollar stayed high and nothing changed, like domestic activity, trading partner activity, or commodity prices, then the Reserve Bank would reassess where it thought rates were headed.
Stephens had warned...
At the time of his fixed rates pick in early March, Stephens said that while the Westpac economics team expected mortgage rates to rise a little over the year, "there is a risk that mortgage rates could stay low for longer than we expect."
"But there is less risk of mortgage rates actually falling materially from here. First of all, the Reserve Bank has flatly indicated that it does not intend to lower the OCR, even if the global economy deteriorates quite seriously. The main scenario in which the Reserve Bank could relent and cut the OCR is a full-blown banking crisis in Europe," Stephens said in March.
"But in that scenario, mortgage rates would not necessarily follow the OCR lower. Global capital markets would probably freeze, making it even more difficult and expensive for New Zealand banks to procure overseas funds. The spread between the OCR and mortgage rates would widen further. Depending on the severity of the crisis, mortgage rates could actually rise rather than fall," he said.
"Given that there are risks, and floating rates are low, why not wait a while longer before fixing? The trouble with that strategy is that others are thinking the same thing.
"If a rush of borrowers all try to fix at the same time, interest rates will be forced up by the surge in demand. Exactly that happened in March and April 2009. There was a rush of borrowers seeking to take advantage of low fixed rates, and only a limited pool of savers/investors willing to commit their savings at such low rates. Market forces quickly saw fixed mortgage rates rise," Stephens said.
"Waiting for the ding-dong low before fixing might make you part of a large crowd all hoping to exit through a small door at the last possible moment. The nimblest few will make it, but most will wish they had exited earlier," he said.
No chart with that title exists.
22 Comments
"Bank says sell this first" - sign in Sth Isld coastal real estate window over Easter weekend
unrelated: http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=108…
"At the latest annual sales rate, there are enough houses for sale to meet over 4.5 years of demand. By any standard this reflects a huge oversupply," Dickens said.
Some sellers are desperate and quitting expensive properties for low amounts.
"The higher discounts were generally for the more expensive sections, for example $900,000 down to $630,000."
The lowest asking price for a section was "inquiries over $150,000" for a section with a rateable value of $330,000.
The bank economists have been wrong for so long it's embarassing. Their job is not to listen to what the RB governor says (he's usually wrong) but work out what is going on in the local and global economy.
I still don't think they really get it but that shouldn't be a surprise really.
Bernard, I think you should change the name of the website to unintersting.co.nz.. People, the sun will still come up tomorrow regardless of what the dribblers at Wespac and the rest of their Economist Bean Counter Ilk proclaim, preach and bleat… baaa baaa baaa – boring.
... oh come on , behave yourself , gee whizz dude ...
Something more 'like " www.CaptainCalamity'sCornucopia-of-Catastrophe.com " is appropriate ......
....... uninteresting.co.nz ? ..... not enough pizzazz , you need showmanship in this game !
Maybe a link to this review at amazon might make it more interesting? Certainly educational for me....
...... we don't require Bernard to give us a renewed sense of pessimism on the Eurozone ....... one third of all the unemployed people in the Eurozone live in Spain ........
The pain in Spain is plain for all to see ....... insane !
........ one is missing Bernard as much as one is missing the opportunity to share a hot-tub with Angela Merkel and Knickerless Sarkosy ........
Just having a troll through small town America' s headlines n bylines GBH...here's a gooden!
One Armed Man Applauds the Help of Strangers.
and this.. Federal Agents Raid Gun Shop, and find Weapons.
or this.....Debora Jackson says she likes shopping at the Dollar palace , because it's convenient and casual. "I don't have to get dressed up like I'm goin to Wal-Mart or something" she said
Tombstone....standard grey , suit someone named Grady Ph....
Wanted. Somebody to go back in time with me. This is not a joke.PO Box 322 Oakview , C.A. 93022. You get paid after we get back. Must bring your own weapons.Safety not guaranteed. I have only done this once before.
NZHerald to Renters: Avoid high rents, Buy your own house.
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=108…
"There is one solution available to renters. Buy a property. Right now the conditions are good. Interest rates are low and Reserve Bank governor Alan Bollard tells us that interest rates in New Zealand will not start to rise soon."
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.