Rates rise over Christmas

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Home Loan Report: Christmas spirit was in short supply in some corners of the mortgage market over the holidays with several lenders raising their rates.

Wednesday, January 10th 2007, 8:45AM

by Maria Scott

Borrowers should be prepared for further increases in the cost of fixed rate funds over coming weeks and months and they can blame the United States economy. Those who have been waiting for rates to fall before signing up to a fixed rate deal may be disappointed.

Statistics published over recent weeks indicate that the US economy is heading for a soft landing and this has reduced the possibility that interest rates will fall. The firmer the view on US rates, the higher wholesale costs are likely to be.

Chris Tennent-Brown, New Zealand economist for the Commonwealth Bank of Australia says that rising global rates through December were significant and local wholesale rates have crept up over the last few weeks.

Donna Purdue, economist at Westpac says that stronger than expected figures on employment levels in the US had dented expectations of a rate cut by the Federal Reserve.

“For quite some time US markets have been building in cuts by the Fed. But that doesn’t seem to be happening. Big investment houses in the US are saying the US (economy) is headed for a soft landing which is being built into the interest rate market.”

Purdue adds: “In terms of fixed rates it is what happens in the US that is the key thing to watch.”

In New Zealand, the Reserve Bank is due to announce a decision on the Official Cash Rate, which currently sits at 7.25%, on January 25.

Purdue says that the market is indicating a 70% chance of a rise in the OCR this month and a 100% chance in March. However, Westpac does not think the Reserve Bank will have to raise rates again this year. GDP growth has been lower than the Reserve Bank had predicted for the December quarter.

Economists may form a clearer view of what the Reserve Bank is likely to do when they see the Consumers Price Index figure for the December 2006 quarter next Wednesday (17 January). There will also be a clue to business activity and confidence next week from the New Zealand Institute of Economic Research survey of business confidence.

Cameron Bagrie, chief economist at ANZ National Bank does not think that the Reserve Bank will raise the OCR again at its next review on January 25. However the outlook could change next week.

“A lot depends on where the currency is and where the CPI figure is,” says Bagrie.

But the general outlook over coming weeks and months is for rates to remain high with the cost of wholesale funding buoyed by the events in the US.

Five year rates remain the cheapest for New Zealand borrowers but these are usually suitable only for those who know they can keep the loan in place for the full five year term.

The increased pressure on the cost of fixed rate funding might be a pointer for borrowers who have been holding out for lower rates to commit themselves to a deal.

Tony Alexander, chief economist at the BNZ put it like this in his pre-Christmas commentary: “I wouldn’t feel that the best strategy would be to dilly dally around looking for a better rate in six weeks time.”

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