To fix or float, what is the answer?
Has New Zealand’s interest rate market fundamentally changed and does that mean attitudes towards floating versus fixed rates should change as well?
Monday, July 2nd 2001, 10:23AM
by Jenny Ruth
Stuart Marshall, economist at merchant bank Bancorp, thinks it has and attitudes should change.
He argues that he demise of the Reserve Bank’s monetary conditions index (MCI) in March 1999 and its replacement with the more steady and stable official cash rate (OCR) has meant a structural shift in the way New Zealand interest rates are priced.
"In this new OCR environment, and despite travelling through a period when monetary policy has completed a full tightening-neutral-easing cycle, the yield curve has managed only a fleeting foray with a negative slope (when long-term rates are higher than short rates)," Marshall says.
In other words, during the whole cycle, longer-term interest rates have usually been higher than short-terms rates.
Under the MCI regime, rates were generally higher and more volatile and for long periods long-term rates were lower than short term-rates.
That means under the OCR regime, fixing the interest rate on a loan will generally be more expensive.
"If we are correct that the interest rate market structure has indeed been altered, then policy should be reviewed," Marshall says.
"Absolute certainty of interest cost is likely now to come at a consistently higher price. Is that certainty still worth it?" he asks.
While his questions are directed at corporate treasurers, the logic should generally be the same for home loan borrowers, Marshall says.
The exception is when we get market distortions, as is happening right now.
Lenders’ profit margins on floating rate loans are currently nearly double that on fixed-rate loans. Most floating rates are now about 7.7% compared with the 90-day bank bill rate of 5.83%, a difference of 1.93 percentage points.
But one-year fixed mortgages are being offered at between 6.7% and 7.1% (and at least one offer at 6.45%), compared with the one-year swap rate of 6% in the wholesale market, a margin between 0.7 and 1.1 percentage points.
And three-year fixed mortgages are mostly being offered at 7.8% compared with the three-year swap rate at 6.8%.
"At the moment, if this is the low
for short-term interest rates, then it means the variable rate
is likely to be going up. That means locking away for three years
at 7.8% is a good thing," Marshall says.
| « Broking firm challenges the market | Lower mortgage rates likely this year but not yet » |
Special Offers
Commenting is closed
|
|
Printable version |
|
Email to a friend |
